How to Start an Emergency Fund
An emergency fund can help you cover life’s unexpected financial events. Read on to learn where to keep emergency fund money (and how much to save).
February 9, 2022
From a car breakdown to an unexpected layoff, there are an infinite number of scenarios that could create a substantial financial strain for your household.
While it’s not possible to predict these unexpected events, it is possible to prepare for them financially. The best way to do this is to build up an emergency fund.
This guide explains everything you need to know about emergency funds, including how to start an emergency fund, how much you might need and where to keep the money until you need it.
What is an emergency fund?
An emergency fund is an amount of money set aside specifically for unexpected expenses (and/or unexpected loss of income). It’s similar to a rainy day fund, but usually is a much more substantial amount of money.
Emergency funds should generally be kept in a savings or checking account — and ideally in one that’s separate from your primary bank account. It’s best not to invest this money, as you want it to be easily accessible in the event of an emergency.
Once set up, your emergency fund will be available to help you pay for any unexpected expense. Examples of these expenses could include:
An emergency fund can also be helpful in a situation in which you unexpectedly lose income. If you lose your job, your expenses likely won’t change much, so it’s important to have funds you can fall back on.
Why you need an emergency fund
Life is full of unexpected events that can alter your life — and strain your finances.
When a financial emergency strikes, many Americans find it challenging to adapt. In fact, 2020 data indicates that approximately 36% of Americans would struggle to pay for an unexpected $400 expense — and 12% wouldn’t be able to pay for it at all.
Many Americans put emergency expenses on their credit cards. But going into debt to pay for unexpected expenses can be a downward spiral, as the purchases can end up costing you more due to the interest payments.
If you are forced to rely on credit cards for a financial emergency, a relatively small unexpected expense could place the burden of debt on your household for years to come.
For this reason, having an emergency fund is one of the most common recommendations from financial advisors and industry experts.
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Plus, having an emergency fund can potentially reduce stress in your life. If you don’t have to worry about how you will pay for emergencies, you can focus your energy on dealing with the emergency itself.
How much emergency fund money should you have?
A good rule of thumb is that you should have 3 to 6 months of living expenses set aside in your emergency fund.
For example, if your household spends around $4,000 per month total, you should aim to have $12,000 to $24,000 in your emergency fund.
Some experts expand this definition to include only basic living expenses, excluding all optional or nonessential purchases.
So if you typically spend $4,000 per month, but your rent, groceries, utilities and all other necessities total just $3,000 per month, you may consider using this $3,000 figure to calculate your emergency fund needs.
You can also use an emergency fund calculator online to determine your target amount. This safety net calculator is a good place to start.
Some people would benefit from having more than the minimum saved, while others may need less. Here’s what you should consider when determining how much to save:
How stable is your job and your industry?
Are you in a single-income or double-income household?
Can you drastically cut expenses if it becomes necessary?
Do you have family or friends who could offer temporary help in an emergency?
Once you figure out how much you expect to need, it’s time to start saving. Here’s how.
How to start an emergency fund
We’ve established the importance of having money set aside for emergencies. Now, let’s explore exactly how to start an emergency fund.
Determine your monthly expenses
Look at your budget to determine how much you spend on necessities every month (don’t consider the nonessential expenses for now). If you don’t actively budget, it's a good idea to start tracking your spending for a month or two, or add up the total of rent, utilities, debt payments, groceries and other vital expenses.
Determine your emergency fund goal amount
Multiply your monthly necessary expenses by three to six times to determine a range for your emergency fund. For new savers, aiming for the low end (three months of emergency savings) may be more attainable. See the section above for more details on what to consider regarding how much to save.
Make a plan to reach your savings goal
You’ll likely come up with a goal that seems intimidating. It might be $8,000, $10,000 or even more. But if you make a plan to break savings down into smaller chunks, it can feel more approachable.
For instance, if your goal is to save $10,000, you could get there in less than two years by saving around $100 per week. If that’s too much, saving $65 a week would get you to your goal in around three years.
And remember — any amount of emergency savings is better than nothing. Even if you can only set aside a small amount of money, it will be a comfort to have it when you have an emergency pop up.
Start a separate bank account
As for where to put emergency fund money, it’s a good idea to keep your emergency funds in a bank account separate from the one you use to pay regular monthly bills. You want the funds to be easily accessible, but if they're in your primary checking account, you may accidentally spend the money.
Opening a high-yield savings account is a good idea, as you may earn a small amount of interest on your savings.
Now comes the nitty-gritty of actually saving toward your goal. Slow and steady wins the race here, so just focus on making consistent progress with regular transfers to your new savings account. You may wish to set up automatic transfers from your primary bank account.
And if you’re looking for some money-saving inspiration, check out these guides from Tally:
That’s all you need to know about how to start an emergency fund. For even more personal finance knowledge, explore the rest of the Tally blog.
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