Three to six months of expenses is a good rule of thumb but your goals will vary based on your financial situation.
If you lose your job, have a medical emergency, need to make home repairs or experience any other kind of last-minute crisis, an emergency fund is a critical tool to ensure you can maintain financial security.
“Emergencies arise for everyone and are almost always unexpected and sudden. Always ensure you have the cushion you need when an emergency arises,” Kenneth Chavis, wealth advisor at LourdMurray, says.
Read on to learn more about how much you should save and get tips for prioritizing emergency savings.
Many Americans Aren’t Prepared for an Emergency
Unfortunately, many Americans simply aren’t prepared for an emergency. According to a recent YouGov survey, 1 in 10 consumers have no savings – and 13% have less than $100. More than half of Americans have $5,000 or less available in savings.
That means that many will have to turn to credit cards, payday loans or other high-interest borrowing solutions to cover costs.
Why Should You Have an Emergency Fund?
“Emergency funds create a safety net that can keep you afloat in a time of need. Emergencies can and do arise, often at the worst times, and having an emergency fund will allow you to pay for those unexpected expenses without having to borrow,” Laura Sterling, vice president, marketing at Georgia’s Own Credit Union.
Though we never expect an emergency, things come up. And if you don’t have liquid cash in emergency savings, you’ll have to reach for alternative payments that could cost you a lot of money in interest.
“We’re in a rising interest rate environment and rates are really high. Any time you have to access credit to pay for that emergency it’s going to cost a lot more than it did six months or a year ago,” Harman Johal, senior vice president, market leader – Texas & Illinois at U.S. Bank, says.
The average credit card interest rate, for instance, was more than 20% in February 2023. That means if you can’t afford to pay off your balance, you could be paying up to 20% more for your emergency than you would if you had cash on hand.
How Much Should You Save in an Emergency Fund?
Experts typically recommend you aim to save three to six months of expenses in an emergency fund. Keep in mind that expenses are not necessarily the same as income, but rather the cost for key purchases like housing, bills and food.
There are situations in which you should save more or less, depending on your financial position.
“The recommendation for an emergency fund will vary based on financial status, stage of life, employment background, industry you work in and generally how aggressive or conservative you are with finances. Someone with considerable accumulated assets – working in a steady, in-demand position or industry – who is less risk-averse may need less of an emergency fund as opposed to someone working in a volatile industry or position who does not have as many assets accumulated,” Chavis says.
Johal adds that if you have inconsistent income – for instance, if you’re retired or self-employed – it’s wise to have a bigger emergency fund to offset expenses in case you have a period of time without income.
Similarly, he adds, those with medical issues or acting as caregivers should consider saving more.
Six months of expenses can be a lofty goal, especially if you’re starting from scratch. The most important thing to remember is just to get started.
What Kind of Account Is Best for Emergency Savings?
As you start to build emergency savings, carefully consider where to keep the money. There are two key factors to keep in mind – accessibility and interest rates.
“Look for an account that pays interest, gives you easy access to your funds without penalty and is insured. While you don’t want to use your emergency fund unless necessary, you need to be able to withdraw your money quickly – and without fees – if an emergency arises,” Sterling says.
The point of an emergency fund is to have access to your savings in a pinch, so opt for a traditional savings account rather than an investment account or any other type of account in which your money would be tied up.
“The best kind of account is a liquid account that you can access with a day’s notice. In general, a savings account or money market fund will be best for most people,” Chavis says.
Still, as your emergency fund will ideally have a relatively high balance, you can use it to your advantage by choosing a high-yield savings or other account with a favorable interest rate so your savings will earn money.
Tips for Building Your Emergency Fund
Saving for an emergency is important but it’s easier said than done. When money is tight, it can be difficult to prioritize setting aside money when there are short-term costs to consider.
Follow these tips to help make your emergency savings a priority:
- Aim for small consistent savings over intensity. According to Johal, starting an emergency fund is a lot like starting to work out. If you try to work out five hours in one day and one hour the next, you likely won’t be able to stick with it as faithfully as if you spent 30 minutes per day. Savings is the same – set aside a small amount every paycheck to get in the habit.
- Pay yourself first. Sterling recommends building your savings into your budget like you would a bill, and prioritizing it equally to other expenses. Consider that you are contributing to your own well being with an emergency fund, so it deserves to take space in your financial plan.
- Set goals. “If you are just getting started, opt for several small goals instead of one large one,” Sterling says. For instance, start with a modest goal of $500 in your emergency fund and go from there. That way, you won’t get as discouraged if you haven’t met your final goal and you can celebrate small wins.
- Automate where you can. Sterling also suggests setting up an automatic deposit from your paycheck into a savings account. It takes the thought out of the process and makes you more likely to reach your goals.
- Hold yourself accountable. Though it might seem embarrassing to share that you are just starting to build emergency savings, Johal stresses that many are in the same situation or have been in it before. By telling your friends or family that you are starting to save, you create accountability for yourself.
