Key Takeaways
- An emergency fund is money you set aside only for true emergencies, like medical bills or job loss.
- Start small by saving $10 to $50 monthly until you reach three to six months of expenses.
- Use a high-yield savings account for safe, accessible, interest-earning storage.
- Automate contributions and review progress to stay aligned with your savings goals.
- Use the fund only for emergencies—avoid dipping into it for everyday spending.
An emergency fund is a savings account in which you set money aside for unexpected expenses. Generally, your emergency fund should hold enough money to cover three to six months of bills in case of an unforeseen crisis, such as job loss, medical plight, or unexpected home repairs. It’s one of the first and most important steps toward building a solid financial foundation.
Before you focus on investing or making large purchases, it’s essential to have an emergency fund in place. The good news is you can start small—contributing as little as $10 to $50 a month, for example—then gradually build it up. In this article, we’ll walk you through how to get started and keep the habit going, so you’re prepared for whatever comes your way, without having your finances derailed by an emergency.
What Is an Emergency Fund?
An emergency fund is a savings account you have set aside for life’s unexpected expenses, such as medical bills, home or auto repairs, or a job loss. While it’s not for planned spending, you still want to make sure it is easily accessible, ideally in a high-yield savings account or other liquid account where you can get to it easily and without penalty. Think of it as a financial safety net that helps you handle surprise costs without needing to turn to credit cards or dipping into your long-term investments or retirement savings.
Why Do I Need It?
An emergency fund is important because it can help provide peace of mind for your family financially. Should an unexpected expense occur, you are ready for it. Meanwhile, you can stay on track with your long-term financial goals. Even if you are living paycheck to paycheck or don’t have enough money to cover six months of expenses, building a small emergency fund of $500 or $1000 can still make a huge difference when it comes to covering expenses without having to use high interest credit cards. Building an emergency fund is one of the first things that you should do to build a solid financial foundation—especially before taking on major financial commitments or aggressively saving for retirement.
Choose the Right Place to Keep It
To establish an emergency fund, you must decide the best type of account to keep your money in. We will explore some of the best options. All offer some combination of easy access to your cash in case you need to withdraw it for an emergency, with various high interest rates.
High-Yield Savings Account (HYSA)
High-yield savings accounts are a great option because they earn higher interest rates than a regular savings account does, funds are easily accessible, and these accounts are relatively safe due to the fact that they are Federal Deposit Insurance Corporation (FDIC) insured for up to $250,000 per depositor, per bank, per ownership category. Several financial institutions, such as Betterment, Wealthfront, and Capital One, offer savings and cash management accounts with high-yield rates.
Money Market Account (MMA)
A money market account (MMA) is similar to a high-yield savings account, and is more likely to include features such as checking or debit card access. Generally, MMA rates are competitive but not quite as good as a high-yield savings rates, and may require a higher minimum balance. Discover Bank, CIT Bank or a credit union may be good places to start your search for a money market account.
Online-Only Banks
Online-only banks can offer very low fees and higher than average interest rates since they do not carry overhead costs from physical locations. SoFi, Chime, and Varo are examples of these types of banks, where you typically can pick up a higher interest rate and easily track your account via mobile app.
Cash Management Accounts (CMAs)
If you already have an investment account at a brokerage, such as Fidelity, Schwab, or Robinhood, it makes sense to at least look at their cash management accounts. These accounts offer competitive rates plus SIPC (more formally called Securities Investor Protection Corporation) protection. They also often combine investing with features such as checking and savings. Just remember, investing exposes your assets to market volatility, which is not ideal for the emergency savings portion of your account.
Credit Union Savings Account
Credit unions typically offer their members better rates than regional or national banks. Because they are community based, they can offer a more personalized experience, and they have a good track record when it comes to keeping your money safe.
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How do I build It?
Getting started is as easy as simply deciding to open a savings account and starting to contribute to it. Once you know which type of savings account you want and at which type of financial institution, you are ready to start building your emergency savings.
Set a Goal
Decide how much you are going to need in your emergency savings account, based on aiming to cover three to six months of expenses. While this may seem like a big number, you can always start with a smaller goal, such as $500 or $1000. Setting smaller savings goals along the journey to fully funding your emergency savings can help you measure your progress and continue saving until your ultimate goal is reached.
Create a System for Making Consistent Contributions
Set your savings plan up for success by automating transfers into your account. If you are able to direct a certain amount or percentage of each paycheck into your emergency savings account automatically, that makes it much easier to reach your savings goals. When that money comes off the top and is immediately set aside, you can’t spend it on other things or forget you have it.
Regularly Monitor Your Progress
Not only is it a good idea to monitor your emergency savings account as you build it, but make it a part of your quarterly or yearly financial review going forward. You may find that your expenses have changed, your life situation has evolved, or you need to rebuild the fund after using it.
Celebrate Your Successes
Reaching your financial goals is a major achievement. Take the time to reward yourself—in a budget-friendly way, of course! Acknowledge progress and keep good habits going. When your emergency savings account is fully funded, look to invest or save those funds that would have been set aside for emergencies into other goals or retirement savings.
Protect It From Non-Emergencies
One of the most important things you can do when setting up your emergency fund is make sure that it is truly for emergencies only. Consider using limited access settings on your emergency account or make it so that you must go to the bank to withdraw money, rather than simply transferring it electronically.
Clearly define what an emergency is not– vacations, getting the newest smartphone, buying jeans on sale at a mall, or any other discretionary expenditure. If you can afford it, set aside a special savings account for “fun” outlays or give yourself a periodic allowance so you can afford things you want without depleting your emergency fund.
The Bottom Line
Building and keeping up an emergency fund is one of the best—and easiest—things you can do to get your finances in shape. You don’t need a big chunk of cash right away. Even small, regular deposits add up faster than you might expect. The trick is to put your money somewhere safe and easy to access, like a high-yield savings account. And remember, this fund is just for real emergencies—so don’t dip into it for everyday stuff. Once it’s set up, you’ll be way more confident handling whatever life throws your way without messing up your overall financial goals.