How to start (and build) an emergency fund
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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. Using funds earmarked for unexpected bills can reduce the need and the costs associated with high-interest credit cards or personal loans to pay them.
Emergency fund statistics
Bankrate recently surveyed Americans regarding the state of their emergency savings, and found:
- More than half (51 percent) of people have less than three months’ worth of savings in an emergency fund.
- If hit with an unplanned $1,000 expense, 44 percent of people would pay it with their savings, compared with 20 percent who would pay with a credit card, 15 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.
- Half of people feel very or somewhat comfortable with their emergency savings, while 48 percent are somewhat or very uncomfortable.
- More than one-third of Americans (34 percent) have less in their emergency fund now than they did before the pandemic, while 17 percent report having more now.
- More than half of millennials (57 percent) have no emergency savings or couldn’t cover three months’ worth of expenses, compared with 44 percent of Gen Xers and 49 percent of baby boomers.
- On the other hand, 19 percent of millennials, 29 percent of Gen Xers and 30 percent of baby boomers have enough emergency savings to cover at least six months’ of expenses.
- Women are less equipped than men to handle emergency expenses, with 57 percent unable to cover more than three months’ worth of expenses, compared with 44 percent of men.
- Meanwhile, more than a quarter of men (27 percent) can handle half a year’s worth of expenses, compared to just 23 percent of women.
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.
Having an emergency fund can provide peace of mind by ensuring that you have money when a sudden expense happens.
A Bankrate financial security survey from January found that:
- Only four in 10 Americans have enough emergency savings to cover an unplanned $1,000 expense.
- Nearly half of Americans (49 percent) are saving less money due to inflation.
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,” says Greg McBride, CFA, 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.
Your 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.
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.
7 easy steps to get your emergency fund started
1. Make a budget and see where you can start saving more money
A 2021 Debt.com survey found that 8 in 10 Americans budget their money, and most of those budgeters reported that the practice either kept them out of debt or helped them pay off their debt.
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 an average of $3,490 on the necessities of housing, transportation and food, according to a 2021 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
Nine out of 10 Americans indicated they were paid through direct deposit in a 2022 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 2.3 percent in October 2022, which is the lowest it’s been since 2005. 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.
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 $66,928, according to the BLS. 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 $3,500 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.
Emergency fund FAQs
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.
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.
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.
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.