Unexpected crises — like a tire blowing out on the interstate or breaking an ankle while traveling — can be extremely stressful.
They can also be costly.
Because the worst often arrives without warning, these unplanned events can derail your finances if you don’t have an emergency fund ready to absorb the shock.
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What Is an Emergency Fund?
An emergency fund is the financial cushion you rely on when surprises occur.
It’s not a credit card you can swipe or a relative you can borrow from. It’s cash you’ve set aside (ideally in a high-yield savings account) that’s easily accessible when you need it.
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Why You Need an Emergency Fund
An emergency fund lowers the anxiety that accompanies financial crises, such as a pet needing urgent surgery or the loss of a paycheck.
Without savings for emergencies, you may be forced to use funds intended for monthly bills, rack up credit card debt or take out a personal loan when unexpected costs hit.
Creating an emergency fund should be a top financial priority if you haven’t yet put one together. Here’s how to begin.
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How to Start an Emergency Fund
Use these steps to begin building an emergency fund today so you can handle the next unexpected situation without maxing out cards, borrowing money, or tapping home equity.
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1. Calculate How Much You Should Save for Emergencies
Many financial advisors recommend keeping three to six months’ worth of expenses in an emergency fund.
That doesn’t mean you need three times your monthly household income. Ideally, you’d save at least three times the amount required to cover your household’s monthly essentials.
Review your budget or recent bank statements to determine how much it costs to keep your household running. Exclude discretionary spending like dining out, clothing, or cable — those can be cut if you need to adopt a bare-bones budget after losing income.
You don’t need a specialized calculator to find your target amount. Add up your essential monthly expenses and multiply by three. If you can save six months instead of three, that’s even better.
If that target feels overwhelming, break it into smaller milestones. Start by saving $500, then keep building toward your full emergency fund.
Some experts, such as Dave Ramsey, suggest beginning with a $1,000 starter emergency fund. (Ramsey’s broader plan later recommends three to six months of expenses after eliminating non-mortgage debt.)
Remember, the purpose of an emergency fund is to give you confidence that you could handle a crisis and cover unforeseen costs. Financial counselor Kumiko Love told Savinly she attempted Ramsey’s approach but couldn’t stick with just $1,000 because, as a single parent, it didn’t seem sufficient for a real emergency.
“I lay awake worrying that $1,000 wouldn’t be enough to feel secure,” Love said.
Also consider immediate costs like a $1,000 car insurance deductible — that alone could deplete a small starter fund and leave nothing for medical bills or other needs.
While three to six months is the common guideline, your emergency fund target may differ based on your circumstances. If you’re the sole earner or work in a sector where finding another job quickly is unlikely, you might aim for more than six months of living expenses.
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2. Decide Where to Keep Your Emergency Savings
Keep your emergency savings liquid and readily available. Avoid locking funds in places that charge penalties for withdrawals during emergencies, such as a 401(k) or a long-term certificate of deposit. While investing can grow money, you don’t want to risk being unable to access your emergency reserve.
Michael Gerstman of Gerstman Financial Group suggests keeping emergency money in a no-risk account, like an FDIC-insured savings or money market account.
High-yield savings accounts commonly offer better interest than standard savings accounts, and money market accounts can also provide higher yields.
Putting cash in a checking account is an option, though most checking accounts earn little to no interest.
Store your emergency fund in an account that reduces temptation to spend. Consider online savings accounts or accounts without debit cards if you’re prone to dipping into savings. Using a different bank or credit union than your primary checking account adds another layer of separation.
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3. Increase Contributions to Your Emergency Fund
A blend of steady monthly savings and occasional lump-sum deposits will grow your fund faster.
Ask your employer to split your direct deposit so a portion goes straight into your emergency savings, or set up automatic transfers from your checking account after each payday. When you don’t see the money in your main account, you’re less likely to spend it.
If your budget is tight, reduce expenses by using cash envelopes, canceling subscriptions, joining a local Buy Nothing group, or switching to cheaper service providers. Alternatively, boost income with a side gig or a part-time job.
You can also add to your emergency savings with one-time windfalls. Sell unused items, stay with friends temporarily and rent out your place on Airbnb, or move bonuses and tax refunds directly into your rainy-day fund before spending a cent.
4. Recognize When to Use (and Not Use) Your Emergency Savings
Starting an emergency fund is just the first step. You also need to know what qualifies as a legitimate reason to withdraw — and what should be left untouched.
Though it may be tempting to access a large balance, resist using those funds except for genuine unexpected expenses.
A practical guideline is to avoid spending emergency money on predictable costs, such as scheduled car maintenance, annual insurance bills, or planned childcare programs. Don’t build a safety net only to spend it on expenses you could forecast. Instead, create separate sinking funds for expected future bills.
And remember: once you draw from your emergency fund, make replenishing it a priority so you’re ready for the next unforeseen event.
