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How to start an emergency fund so you’re prepared for life’s curveballs

Updated January 5, 2023, 4:40 PM UTC
A jar labeled "emergency fun" with money in it.
Saving might seem impossible, but it's OK to start small and build up your nest egg over time.  
Photo Illustration by Fortune: Original Photograph by Getty Images

Before the pandemic, it was normal to think of saving for financial emergencies as an “in case of emergency” scenario. 

But after witnessing or experiencing layoffs, medical crises, and general uncertainty, many are rethinking how they save and plan for the unexpected. A recent survey from Personal Capital revealed that 51% of Americans say having an emergency fund is now a higher priority than it was in the past.

But if you don’t have much saved, where do you start? Here’s a step-by-step guide to setting up an emergency fund and how much you should save, based on your own budget.   

What is an emergency fund?  

An emergency fund is a cash reserve that you set aside to cover unplanned expenses—like medical bills, home maintenance, car repairs, or a period of unemployment. 

Without savings, even a small emergency can set you back financially. Less than half of Americans have enough savings to cover a $1,000 emergency, according to a Bankrate survey. What’s more, about 35% of those surveyed said they would finance their emergency using a credit card or a personal loan, or by borrowing money from family and friends. However, personal finance experts caution against this practice.  

“Relying too heavily on debt as a financial safety net can lead to bigger problems down the road,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. “And it can have consequences for your credit score if the debt becomes unmanageable.”  

How to start an emergency fund  

Everyone’s financial situation is different, so the amount you save, where you put the money, and when you tap the fund depends on your own budget and preferences. 

1. Budget your income and expenses 

Before stashing money into an emergency fund, it’s a good idea to crunch some numbers and make a plan. You’ll need to calculate: 

  • Your take-home pay 
  • How much you spend on basic living expenses 
  • How much you want to save 

Look over your most recent pay stubs to see how much you bring home each month. Then list out your essential living expenses, which may include housing, transportation, groceries, utilities, loan or other debt payments, and other important costs. 

For example, let’s say you earn $55,000 a year, and you net $3,375 per month after taxes and benefits. Let’s imagine your monthly living expenses add up to $2,375.  

When you subtract the living expenses from your take-home pay, what’s left is your discretionary income: 

$3,375 – $2,375 = $1,000 

You’ll use your discretionary income to figure out how much to save in the next step.  

2. Plan your savings goal and how much to set aside each month  

Now it’s time to set a savings goal and make a plan to get there. While there’s no one-size-fits-all goal for everyone, many personal finance experts recommend saving three to six months’ worth of essential expenses. In our example, that goal would fall between $6,000 and $12,000.  

But consider your own situation. For instance, you might get by with three months’ worth of expenses saved if you live in a low-cost area, while someone with a lot of recurring debt payments may want six months. And if you’re the sole wage earner with limited resources, then you might feel more comfortable with 12 months’ worth of expenses saved. 

Saving thousands of dollars might seem impossible. But it’s OK to start small—create a starter emergency fund—such as $500—and build up from there.  

Going back to our example, you have $1,000 in discretionary income each month. Even the most parsimonious among us would be hard pressed to put all their discretionary income toward a savings goal. It’s important to be realistic about how much you want to sacrifice to save for an emergency so you don’t start big and then burn yourself out. In this case, let’s say you decide to put $400 a month toward your savings goal. Divide your goal by the amount you want to set aside each month to figure out how long it will take to save the money. 

If you decide to save three months’ worth of expenses: 

$6,000 goal / $400 saved per month = 15 months  

And if you decide to save six months’ worth of expenses, here’s how that would pan out: 

$12,000 goal / $400 saved per month = 30 months  

3. Pick your savings vehicle  

Your emergency fund should be kept somewhere you can easily access so it’s not hard to withdraw them quickly should an emergency arise.

As you shop around, consider whether the bank charges fees, sets minimum balance requirements, and pays you interest. Also check your withdrawal options.  

Here are a few types of accounts to check out: 

  • High-yield savings accounts provide a higher annual percentage rate (APY) than traditional savings accounts. When you need your funds, you can instantly move the money to a checking account and withdraw from there. 
  • Certificates of deposit (CDs) provide a guaranteed rate of return if you keep your money in the account for a specific period of time, ranging from a few months to several years. While you can withdraw money from the CD during this time, you’ll typically have to pay an early withdrawal penalty. You won’t be able to make deposits after adding the initial funds. This option isn’t the best if you are looking for an account that allows for easy withdrawals.  
  • Money market accounts (MMAs) also usually earn a higher APY than traditional bank accounts, and they may come with a debit card and check-writing capabilities.    

4. Automate recurring transfers to your account  

Once you’ve opened an account, the next step is setting up regular contributions. Automation can make saving easy and remove the temptation to spend your hard-earned money if it’s already tucked away into account designated for saving and not spending. “If you don’t see it, you won’t spend it,” says Maura Attardi, director of financial wellness at Money Management International.  

In our example, your goal is to save $400 a month—so you might save $200 per pay period. You can sometimes set up direct deposit so that a portion of your paycheck goes straight to savings, or you can set up automatic transfers to move money from your checking account to your savings.  

Want to step it up a notch? Look for more ways to save. “If you receive some form of [extra] money—like a tax refund, rebates, or a bonus at work—earmark that for your emergency savings fund,” Attardi says. You don’t have to put all that extra cash toward your emergency fund, but every little bit will help you get there faster.

She also suggests telling your friends and family about your savings goal, so they can support you, encourage you, and hold you accountable to your goal.  

5. Continue saving once you reach your goal  

If you’re able to reach your savings goal—don’t stop there. It’s a good idea to continue saving even when you think you might not need to. “Revisit your budget from time to time and adjust according to your needs and goals,” McClary says. For instance, you might: 

  • Set up another savings goal, such as an upcoming vacation or a down payment on a house or car  
  • Replenish the emergency fund if you’ve dipped into it   
  • Add to the fund if your living expenses increase, you don’t have a steady income, or you work in a high-risk industry where you might be worried about lay-offs.

It’s also important to save for the long term. The rule of thumb, Attardi says, is to save at least 10% of your income for retirement. But you might decide to start with a smaller percentage (even 1% is better than nothing!) and work your way up.   

When should you tap into your emergency fund?  

An emergency fund is there when you need it—but what constitutes a need?  

“It’s your money, so you get to set the rules,” says McClary, adding that it could make sense to use your emergency fund in the event of a: 

  • Job loss 
  • Reduced income 
  • Car breakdown 
  • Major home repair 
  • Large medical expense 

But before you tap your emergency fund, make sure you truly need to. “Ask yourself: ‘Do I need this to survive?’” Attardi says. “If not, then taking other steps, like examining your current budget and making adjustments, might be the better option.”  

For instance, you might consider asking your lenders about payment plans, if you need to pull back on how much you’re putting toward monthly payments.

The takeaway 

How you choose to save and manage your money is very personal choice that varies based on your needs and income. Ultimately, saving what you can each month for the unexpected will always keep you afloat in your time of need. 

If you need to use your emergency funds, make a plan to repay it down the road. “Adopting the mindset of ‘pay yourself first’ can help people not only save for financial goals,” Attardi says, “but also those unexpected events in life.” 

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