What is an emergency fund's purpose?
Life has a way of throwing curveballs – surprise car repairs, sudden job loss, emergency medical expenses – the list goes on. These moments often come without warning, and, without preparation, they can derail even the most carefully managed finances.
That’s where an emergency fund comes in. An emergency fund serves as your personal financial safety net, designed to catch you when life doesn’t go according to plan.
More than just a savings account, an emergency fund provides peace of mind. It ensures that when the unexpected happens, you don’t have to rely on credit cards, high-interest loans, or borrowing from family or friends. Instead, you’ll have a cushion ready to soften the financial blow and help you stay on track. Let’s break down what an emergency fund is, how much you should save, and how you can start building one right now.
What is an emergency fund?
An emergency fund is a dedicated pool of money set aside to cover unplanned expenses, such as doctor’s bills, car repairs, or regular bills, should you become unemployed. Unlike savings for birthday gifts, vacations and travel expenses, or other fun spending, an emergency fund is specifically for unexpected and urgent financial needs.
Ideally, an emergency fund should be easily accessible. For example, it might be kept in a High-Yield Savingsor Money Market account so that you can tap into it quickly when needed. This fund should be kept separate from your day-to-day spending money to avoid accidental use. Overall, the goal of an emergency fund isn’t to make money through investments or high returns. Its primary purpose is security. It’s a good idea to regularly contribute to your emergency fund until it has enough to cover most surprise expenses!
How much should an emergency fund be?
There’s no one-size-fits-all number for emergency savings. There are, however, guidelines that can help you determine what’s right for you. A common recommendation is to save enough to cover three to six months’ worth of essential living expenses. That includes rent or mortgage, utilities, groceries, transportation, and insurance.
That said, this range can vary depending on your lifestyle, family size, job security, and other financial responsibilities. For example, a single individual with a steady income and minimal obligations could be fine with three months' worth of savings, while a freelancer with a fluctuating income or a family of four might aim for enough cash to cover six months or more.
If that target feels overwhelming, don’t worry! It’s okay to start small. Even $500 to $1,000 can help cover minor emergencies and prevent you from slipping into debt. What matters most is getting started and building steadily.
How much emergency fund should you hold in cash?
That depends on your personal risk tolerance and financial stability. Remember, the point of an emergency fund is to improve your financial wellness. So, while you might keep the bulk of your emergency fund in a high-yield savings account, some people like to keep a small amount in physical cash for certain emergencies, such as natural disasters or power outages, where digital access might be compromised.
How to save money for a personal emergency
Saving for a personal emergency can feel daunting when you're starting from zero. But with a structured approach and commitment to consistency, building your fund is more than achievable. Here's a practical five-step plan to get started.
Step one – Set your savings goal
First, you’ll want to calculate a budget with your essential monthly expenses. Essential expenses are the necessities you can’t live without, such as housing, food, utilities like water and electricity, transportation costs, and healthcare. Multiply that number by the number of months you want your fund to cover – remember, that’s usually three to six months unless you have another goal in mind. For example, if your monthly living costs are $3,000, your three-month emergency fund goal would be $9,000.
Breaking that goal into milestones can make it feel more manageable. Determine the opening balance on your account. As we shared earlier, that could be $100 or $500. Then consider how much you can contribute periodically – that could be with each paycheck, or once a month, whatever fits your needs. Small contributions become big savings faster than you think!
Step two – Choose and open a savings account
Next, it’s time to open a separate high-yield savings account specifically for your emergency fund. Look for accounts with no monthly fees, competitive interest rates, and easy access. Keeping this savings account separate from your checking account can help reduce the temptation to dip into it for non-emergencies.
Some online banks offer higher interest rates and useful savings tools, like automated deposits and goal tracking. Generally, credit unions like Sharonview are excellent choices for savings thanks to their competitive rates and local branch access. Be sure your selected credit union is NCUA-insured to provide additional peace of mind that your money is safe.
Step three – Begin with small contributions
Start with what you can, even if that’s $10, $25, or $50 a week. Small amounts add up quickly over time. The important thing is to get started sooner rather than later. Saving consistently establishes the habit and builds momentum (both mentally and financially through the power of compound interest).
If you receive any windfalls, like a tax refund or work bonus, consider putting a portion toward your emergency fund to boost your progress. These can be smart ways to give your savings account a big boost and hit your savings target faster.
Step four – Set up automatic savings
Automating your savings is one of the most effective ways to grow your fund. If you set up direct deposits into your savings account or automate checking to savings transfers, you can ensure consistent contributions without having to manually perform the transactions yourself on payday.
Treat your emergency fund like a paycheck to yourself. This "pay yourself first" mindset prioritizes your financial stability and maximizes savings growth over time.
Step five – Always replenish the savings you withdraw
If you ever need to dip into your emergency fund, that’s okay – that’s exactly what it’s there for. Once the emergency passes, make it a priority to rebuild the amount you used.
This might mean temporarily increasing your savings contributions or redirecting extra funds from other parts of your budget. The goal is to restore your safety net as soon as possible so you’re prepared for the next unexpected event.
Start building an emergency fund today
In life, you’ll encounter a bump in the road sooner or later. An emergency fund is the best way to prepare so that when those bumps come, you don’t veer off course and you have given yourself a softer landing. Whether you're just starting your financial journey, rebuilding your fund, or looking to fortify your existing plan, the best time to begin building your emergency fund is now. Use these actionable steps to jumpstart your emergency fund today!