How to Start and Build an Emergency Fund

Your emergency fund should be worth three to six months of living expenses, enough to cover them if you lose your source of income or if it gets reduced.

By Nathan Paulus

Edited by Katrina Raenell

Updated: December 21, 2024

Advertising & Editorial Disclosure

Unexpected expenses are bound to happen. Creating an emergency fund is an excellent way to ensure your financial security doesn’t suffer when a large medical expense occurs or layoffs hit your company. It can also be essential savings for necessary projects and repairs. When your emergency fund is prioritized as one of your top financial goals, you can be financially better prepared.

Getting started on your savings can be a rewarding process when you know how much you should save, where to keep your emergency fund and when to use it. Learning how to create this type of financial security can maximize the benefits it offers.

An emergency fund can help cover necessary expenses, including food, housing, utilities, transportation and health care. Although costs vary per person, experts typically suggest at least three to six months’ worth of living expenses.

The personal savings rate in the U.S. is 2.4%. That means the average American typically saves only 2.4% of their disposable income.

Around 40% of U.S. workers said building emergency savings was a financial priority.

The median emergency savings of U.S. workers was only $5,000 as of late 2021. However, 1 in 3 people reported having less than $5,000 saved.

Approximately 68% of adults said they would use cash or its equivalent to cover a $400 emergency expense. That means around 32% of adults don’t have enough to cover $400 worth of unexpected costs.

Sources:

Board of Governors of the Federal Reserve System, Bureau of Economic Analysis, Transamerica Center for Retirement Studies and Washington State Department of Financial Institutions

What Is an Emergency Fund?

An emergency fund is money a person sets aside to cover possible unexpected expenses or emergencies. Typically, these savings are for essential expenses such as food, housing, utilities, transportation and health care. The money can also be a financial cushion for job loss.

Emergency funds are typically cash or other liquid assets that can convert into cash, such as money market accounts, short-term bonds and money market accounts.

An illustration of a woman learning why having an emergency fund is important.

Why Is Having an Emergency Fund Important?

Emergencies can lead to unexpected expenses. An emergency fund can help you maintain financial security by providing money to cover huge costs.

Unexpected expenses may vary. While some may only need a few hundred bucks for car or home repairs, others may require a huge amount for medical bills, a family crisis or even unemployment. It’s typically best to prepare for any possible financial blow when building an emergency fund.

You could feel less financial stress

Knowing that you have enough money to cover your financial needs can bring you peace of mind. This can also help you continue to make wise financial decisions.

Your spending habits may improve

Saving for emergencies can build financial discipline, which can help you navigate your finances better.

You have a reserve when facing job loss

Getting laid off or quitting your job may mean losing your source of income. A substantial emergency fund can help you cover necessary expenses until you find your next opportunity.

You can cover medical expenses

A well-funded emergency savings can help you deal with the exorbitant costs of a significant medical condition or emergency.

How Much Money Should Be Saved in an Emergency Fund?

The amount necessary to have a sufficient emergency fund may vary per person. Generally, you need to save enough to cover your basic living expenses should you lose your source of income or if it gets reduced. As a rule of thumb, you may need to set aside three to six months of living expenses. You should also consider your income, essential expenses and current debt.

CALCULATE YOUR LIVING COSTS

Living costs vary. It’s crucial to know how much you spend on necessities. To determine the amount you need for your emergency fund, create a list of your necessary expenses, including housing, transportation, food, health care, insurance, utilities, debt and personal expenses. You may also use a cost of living calculator to get an estimate based on where you live.

An illustration of an emergency fund piggy bank.

Steps to Start Saving Money for an Emergency Fund

Creating an emergency fund can be a stress-free process when you know how to start saving money. Contrary to some beliefs, you don’t need to start with a large amount. The important part is that you’re starting somewhere.

There are various strategies to build an emergency fund quickly. You can use all of them or choose which ones work best based on your situation.

1
Determine your emergency fund goal
When calculating your monthly living costs, make sure you only include essential expenses such as your rent or mortgage, utility bills, insurance premiums, transportation costs and groceries.
2
Set a monthly saving goal and automate your savings
Once you have an emergency fund goal, determine how much you may need to save every month. You can set aside a percentage of your monthly income for it. You can also set up an automatic deposit to your savings account to avoid spending money.
3
Make a budget
Budgeting is crucial when managing your finances and ensuring you save enough for your emergency fund. You may use budgeting tools or money-saving apps if you find it challenging.
4
Save unexpected income
You may receive extra money — a gift or a bonus at work. Instead of spending it immediately, consider adding it to your emergency fund. This can help you meet your goal faster. After reaching your target, you could also start investing any extra money.
5
Monitor your progress regularly
It’s important to check your emergency fund periodically. Consider writing down the total amount you have every time you make a deposit. If possible, set up automatic notifications to get updates on your account balance.
6
Keep it separate
Set up a separate account for your emergency fund. Don’t attach it to your spending or savings accounts. This prevents you from inadvertently spending your emergency fund.
7
Reduce your spending
Review your expenses and determine ways to reduce your monthly spending. For example, create a list of all your subscriptions. Determine which of them you no longer use or need. Eliminating unnecessary expenses can help you save more money to reach your emergency fund goal faster.

Saving While Living Paycheck to Paycheck

Approximately 125 million or 63% of Americans live paycheck to paycheck. This doesn’t only include low-income individuals. Around 40% of U.S. workers earning more than $100,000 and 53% of those earning between $50,000–100,000 said they live paycheck to paycheck.

Although this situation makes it harder to save money, being strategic with your savings can help you build an emergency fund.

1
Start small
You don’t have to set aside a huge amount immediately. Consider your cash flow. It’s okay to start small and slowly increase the amount.
2
Treat savings as bills
Be consistent. Make saving a habit. You can set up automatic deposits every payday.
3
Save your income tax refunds
If you’re expecting a tax refund, consider adding it to your emergency fund. You can have it deposited directly to your account when you file taxes.
4
Set spending rules
You should also be a wise spender. Avoid impulse buying. Make sure you always prioritize necessities.

Best Places to Keep an Emergency Fund

An emergency fund should be easily accessible. At the same time, it must be safe.

The best choice may vary depending on your needs and preference. There are also factors to consider when looking for the best savings accounts. The most important are the minimum deposit requirement and annual percentage yield (APY).

Regular savings account

A standard option for an emergency fund is a regular savings account in a brick-and-mortar bank. It’s easy to access at a time of need. However, remember that regular savings accounts tend to earn little interest. To avoid withdrawing from your emergency stash, make sure you separate it from your other savings and checking accounts.

Online savings accounts

Another easily accessible option is an online savings account. You can find online banks offering higher interest rates compared to traditional banks. However, there may be minimal fees. You may also not find a physical office you can visit for transactions. Additionally, you may have to transfer the cash from your account when you need to make a withdrawal.

High-yielding savings accounts

Some banks offer high-interest rates for savings accounts. This allows you to grow your emergency fund faster. Typically, you can find these at online banks. It also doesn’t hurt to inquire from traditional banks.

Money market account

Money market accounts usually have tiered interest rates — the more money you deposit, the more you earn. However, you may need to keep a minimum amount to avoid penalties. You can get money market accounts from credit unions and banks.

Best Savings Accounts

Comparing your options can help you decide which savings account is best for your needs. Below are some savings accounts that offer good APY and require a minimal or no deposit amount.

Savings Account	APY	Minimum Deposit
CapitalOne Savings	3.30%	No minimum
CiT Bank Savings Connect	4.05%	$100
LendingClub High-Yield Savings	4%	$100
PNC Bank High-Yield Savings	4%	$1 (to earn interest)
SoFi Checking and Savings	3.75%	$250
UFB Direct Savings	4.21%	N/A

An illustration of a woman breaks open her piggy bank.

When to Use an Emergency Fund

Before using your savings, ensure you’ve defined what constitutes a legit emergency. This can help you determine when it’s the right time to tap into your emergency fund. You would typically only use your emergency savings for unexpected, urgent or necessary expenses, such as living expenses after a job loss, medical emergencies and significant home or auto repairs.

If you ever encounter a situation requiring you to use your emergency fund, replenish it as soon as possible to ensure you have a safety net.

Living expenses after losing a job

Losing a job will significantly impact your financial situation. An emergency fund will give you a source of funds to pay for necessary expenses.

Necessary medical expenses

Medical emergencies can be scary. Aside from health issues, you also need to face huge expenses. All costs may not be covered even if you have a health insurance policy. Furthermore, you may also need to take some time off to recover.

Emergency home repairs

Depending on the extent of damage, you may need to use your emergency fund for home repairs. For example, calamities and natural disasters.

Major auto repairs

You may need to consider pricey car repairs when determining the amount of your emergency fund. Determine what constitutes a major auto repair to you. For instance, planned maintenance wouldn’t be included, but unexpected issues should be added to your list.

Ask the experts:

When is the best time to start building an emergency fund?

Co-founder, Managing Partner at Waypoint Pathfinders, LLP

There is a famous Chinese proverb about the best time to plant a tree. It can be paraphrased to apply to our topic as the best time to start building an emergency fund was 20 years ago; the second best time is now. It takes time to save, so start today.

You establish an emergency fund when you put away money intended to be used during times of financial hardship. Emergency funds should typically have three to six months' worth of expenses. However, the 2020 economic crisis and lockdown have led us to suggest up to one year’s worth. The best size for an emergency fund depends on a number of factors, including your financial situation, expenses, lifestyle and debts.

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Additional Resources

Many resources are available to help you manage financial emergencies. MoneyGeek compiled a list of some valuable resources and tools below.

Budgeting and Saving

52-Week Challenge: Create a money-saving habit by taking the 52-week money challenge. This is a great option for individuals who need help building the habit of saving.
America Saves Pledge: Pledge yourself to stay motivated in building an emergency fund. Create a simple plan that includes your purpose and savings goal.
CFPB Spending Tracker: Keep track of your spending and be better at budgeting using the Consumer Financial Protection Bureau’s spending tracker.
Simplifi: Get insights on your spending, set saving goals and track your finances using Simplifi by Quicken.
SMART Goals Tool: Start your journey toward financial security with the help of the Consumer Financial Protection Bureau’s (CFPB) tool. Set financial goals based on your motivations.
Downloadable Apps: Take control of your finances with the help of budgeting and money-saving apps like Mint, Honeydue, Goodbudget and YNAB.

Financial Support

Benefits.gov: Use the search tool or sort through the directory to find financial assistance programs available in your state.
Foundation for Appropriate and Immediate Temporary Help: Get temporary, short-term or long-term assistance to address financial emergencies.
Federal Trade Commission: Get tips you can use when you’re having trouble juggling your financial responsibilities, including bills and debt.
Low-Income Home Energy Assistance Program: If you have a hard time paying utility bills, consider applying to LIHEAP to get assistance for energy costs.
Supplemental Security Income (SSI) Program: Find out more about the SSI program and how it works. Determine if you’re eligible to receive benefits.
USA.gov: Browse through government benefits for individuals and families in crisis.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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sources

Board of Governors of the Federal Reserve System. "Report on the Economic Well-Being of U.S. Households in 2021 – May 2022." Accessed December 10, 2024.
Bureau of Economic Analysis. "Personal Saving Rate." Accessed December 10, 2024.
Transamerica Center for Retirement Studies. "Emerging from the Covid-19 Pandemic: A Compendium About U.S. Workers’ Retirement Outlook – 22nd Annual Transamerica Retirement Survey of Workers." Accessed December 10, 2024.
Zippia. "How Many Americans Live Paycheck to Paycheck? [2023]: Income Insecurity Statistics in the U.S.." Accessed December 10, 2024.

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