How to start (and build) an emergency fund
Suppose you’re unexpectedly called into your boss’s office one day and given the tough news that you’re getting laid off. Panic sets in as you think about bills, rent and putting food on the table.
It’s a situation that many of us fear. Events such as job loss, medical emergencies and car repairs and more can happen to anyone, without warning or time to prepare. But there’s one hack that can give you some peace of mind in advance of these events: An emergency fund.
An emergency fund isn’t just about money — it’s about not having to worry constantly about possible setbacks, knowing you have a safety net to catch you if you stumble. Yet, according to Bankrate’s most recent emergency fund report, only 44 percent of Americans could afford to cover an expense of $1,000 or more from their savings.
If you find yourself uncomfortable with your emergency savings or lacking an emergency fund altogether, here’s how you can build one and stave off financial worries.
What is an emergency fund?
An emergency fund is money in a bank account that’s set aside for unplanned expenses, such as medical bills, car repairs or home repairs. An emergency fund can also help you weather a loss of income from job loss or extended illness.
Serving as a financial cushion, an emergency fund helps you breathe easier, knowing you can handle life’s curveballs without going under. It also reduces the need to rely on high-interest credit cards or costly personal loans to pay for sudden expenses.
Emergency fund statistics
Bankrate recently surveyed Americans regarding the state of their emergency savings, and found:
- If hit with an unplanned $1,000 expense, 44 percent of people would pay it with their savings, compared with 21 percent who would pay with a credit card, 16 percent who would pay it but have to cut other spending, 10 percent who would borrow from family or friends and 4 percent who would take a personal loan, as of December 2023.
- While a majority (55 percent) of adults have more savings than credit card debt, a significant amount (36 percent) still have more credit card debt, as of December 2023.
- Nearly a third (30 percent) of adults have more emergency savings than they did a year ago, but 32 percent have less than they did last year and 9 percent have none at all, as of December 2023.
- More than half (53 percent) of people have less than three months’ worth of savings in an emergency fund, as of May 2023.
- More than half (57 percent) of people feel very or somewhat comfortable with their emergency savings, while 43 percent are somewhat or very uncomfortable, as of May 2023.
Why an emergency fund is so important
An emergency fund is an essential part of a solid financial plan. It can help you pay unexpected expenses and avoid taking on more debt from high-interest credit cards or loans.
Not having enough emergency savings can also cause a sense of financial anxiety. Bankrate’s emergency savings survey found that:
- More than half (57 percent) of Americans are uncomfortable with their level of emergency savings.
- Two-thirds of Americans are worried that they wouldn’t be able to cover a months’ worth of expenses if they lost their job tomorrow.
The findings reaffirm the need for households to have a well-funded stash of cash and that it’s never too soon to start saving for an emergency.
By nature, unplanned expenses are unexpected, so the sooner you’re prepared the better off you’ll be when the inevitable happens.— GREG MCBRIDE, BANKRATE CHIEF FINANCIAL ANALYST
Without an emergency fund, your only options may be credit cards, personal loans or asking relatives or friends for money.
How much to save in your emergency fund
An emergency fund should cover three to six months’ worth of expenses, but saving that amount takes time. To help get you started, begin with small goals, such as saving $5 a day. Then work your way up to a reserve to cover several months’ worth of expenses.
“It can feel like a mountain trying to build what feels like it should be a small thing for most people,” says Ryan Johnson, BFA, founder of Hundred Financial Planning. “The most important thing is making progress, even if it feels small to start. This can mean $50 a month for some people.”
Your ultimate savings goal will depend on your income and expenses. Focus on having enough to cover expenses, not on replacing your entire income. Essential monthly expenses commonly include housing, utilities, transportation, food, and credit card or loan payments.
To determine how much you need to save, add up your total costs per month, and then multiply that total by however many months’ worth of expenses you wish to have on hand.
Sole breadwinners, business owners or those with variable incomes should aim for nine to 12 months’ worth of expenses in an emergency fund, to account for the higher volatility in their income.
Where to keep your emergency fund
The best place to keep your emergency fund is in a high-yield savings account, which offers easy access and pays a competitive yield. Look for banks and credit unions that insure deposits through the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA).
Online-only banks are good options for an emergency savings account because they typically offer higher yields and charge lower fees than brick-and-mortar banks. Fees can eat into your emergency fund balance, which makes comparing savings rates and account features key.
Also, there’s no need to stick with an account just because you’ve had it a while. Consumers keep their savings accounts for an average of nearly 17 years, according to a January 2022 Bankrate survey, but if the current account charges monthly fees or pays a subpar annual percentage yield (APY), it’s worth some inconvenience to find a new account that offers better terms.
Bankrate’s take: Consider keeping your emergency fund in an online savings account, which typically pays more interest and comes with fewer fees.
7 easy steps to get your emergency fund started
1. Make a budget and see where you can start saving more money
Budgeting is a time-tested method for keeping track of your finances and curbing spending. In fact, 13 percent of those surveyed in Bankrate’s emergency savings report said that budgeting better is their main financial goal for 2024.
To find ways to save, you first have to understand where and how you spend. Budgeting helps you distribute your income more efficiently and find ways to reduce or manage your spending. Bankrate’s Home Budget Calculator can help you to set a budget.
A budgeting app is another useful tool that can help you calculate income and expenses to provide a dashboard view of your financial situation.
2. Determine your emergency fund goal
The average household spends $3,828 monthly on the necessities of housing, transportation and food, according to a 2022 survey by the U.S. Bureau of Labor Statistics (BLS). Calculating what your household needs for such necessities is key in determining your emergency fund goal.
A budget is a spending plan that helps you to determine how much money you need each month to cover essential expenses. This number can be calculated by adding up monthly costs for housing, food, transportation and other necessities and then multiplying the sum by six, which gives you the amount you need to cover six months of expenses. It will take most households some time to reach the six-month goal.
3. Set up a direct deposit
About 95 percent of Americans indicated they were paid through direct deposit in a 2023 American Payroll Association survey.
Direct deposit automatically deposits your paycheck and other funds directly into your checking or savings account, eliminating the need to manually deposit checks. But all your funds needn’t go into just one account. Setting up a split direct deposit allows you to direct a specific amount of money to your emergency fund with the remainder going to your checking account or vice versa. There are also savings apps that can automatically transfer a percentage of your paycheck into a savings account.
Automating the process not only simplifies saving, it can also help keep you on track toward your savings goals.
4. Gradually increase your savings
According to the Bureau of Economic Analysis, the U.S. personal saving rate was 3.7 percent in December 2023. Personal saving rate is the percentage saved out of one’s disposable income.
One way you can boost your savings rate over time is to increase the amount you’re contributing to your emergency fund by 1 percent or a specific sum, until you’ve reached your savings goal. Increasing the amount in increments can help to make the smaller deposit into your checking account appear less noticeable.
“The best way to build up emergency fund savings when cash flow is tight is to take tiny steps that add up over time,” says Noah Damsky, CFA, Principal at Marina Wealth Advisors. “If you want to save $150 per month, save $5 per day. Not only is it less daunting, but it helps you realize how you can reach your goals by making small sacrifices,” he adds.
5. Save unexpected income
A financial windfall consists of coming into a significant amount of money, unexpectedly. Of those who receive such a windfall, 70 percent won’t have any of the money left after a few years, according to the American Institute of Certified Public Accountants.
At least a part of any windfall that you receive should be used to add to an emergency fund, unless you already have a sufficient one established. Unexpected money can come in the form of a tax refund, bonus, cash gift, inheritance, or winning a contest or the lottery.
6. Keep saving after reaching your goal
The average cost of living for one year is $72,967, according to the BLS as of 2022. The more you can add to your emergency savings, the longer you’ll be able to stay afloat if you end up out of work due to a job loss or illness.
Some emergencies require more than a six-month cushion. Being unemployed for more than a year or being hospitalized for several months are both situations where you’ll be glad you have more money saved in your emergency fund.
7. Use a bank account bonus to jumpstart your savings
Banks frequently offer cash incentives to new customers for opening new checking or savings accounts. The additional cash can be useful in establishing an emergency fund or adding to an existing one. Currently, banks are offering up to $3,000 in bonuses for opening a new checking or savings account, or to those who refer a friend or family member.
In addition to looking for a bank account bonus, another way you can increase your bank account balance is by making sure you’re getting the best return on your money. The best rates can often be found at online banks, which don’t have the overhead costs of maintaining branches.
Keeping your savings organized can help keep you on track to meet your financial goals. Consider housing your emergency fund in a separate account than a vacation fund, for instance. This may help prevent you from tapping into emergency savings for other purposes. Some bank accounts allow you to allocate portions of your money into different buckets.
Bottom line
Having an emergency fund is crucial for financial stability and peace of mind. It can help cover unexpected expenses and prevent the need for high-interest credit cards or loans.
Aim to save three to six months’ worth of living expenses and consider automating your savings through direct deposit or savings apps. Start small and make it a priority to build your emergency fund, as it can make all the difference in times of financial uncertainty.
Emergency fund FAQs
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Experts recommend having three to six months’ worth of living expenses saved in an emergency fund. This can help keep you afloat in the event of a job loss or unplanned expense such as a medical bill or car repair.
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How quickly you should fully fund your emergency savings depends on how much you’re able to save each month. Many consumers need to balance saving money and paying down debt. One way you can increase the amount you save is by taking a close look at your spending and identifying areas that can be trimmed, such as entertainment or dining out.
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Once you’ve created a budget, you’ll be able to set realistic monthly savings goals. Even putting away as little as $10 to $100 a month can add up over time.
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The best place for your emergency fund is a liquid savings account, where you’ll be able to access the money quickly, if needed. An example is a high yield savings account.
— Bankrate’s René Bennett and Matthew Goldberg also contributed to this story.
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