What Is an Emergency Fund?

Even with the most careful planning, life can throw some pretty big curveballs. 

All it takes is driving over a nail, getting sick, or losing your job to find yourself wondering how you’re going to pay your bills on time — or at all. 

This is where an emergency fund can really come in handy. 

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How an Emergency Fund Works

Emergency funds are savings you set aside in case a large, unexpected expense comes up or you lose your income. 

The point of an emergency fund is to be able to pay your bills even under financial strain. This way, you can avoid turning to high-interest debt like credit cards just to get by. 

An emergency fund can also help you continue to make debt payments (like your mortgage or student loan), even if you lose your job.

Ideally, you won’t touch your emergency fund unless an actual financial emergency arises. 

For example, let’s say you are in a car accident and need expensive car repairs. You need your car to get to work, otherwise you’ll lose your income. 

If you don’t have enough money in your checking account to pay that auto repair bill, you can tap into your emergency fund to cover the expense. 

How Much Emergency Fund Do You Need?

There is no hard and fast rule for how much money you need to have in an emergency fund. But a popular opinion is to have three to six months' worth of living expenses set aside. 

That way, if you lose your job, you have a few months to find a new one. If you don’t lose your job but face another financial hardship, that amount should still be enough to cover most emergency expenses. 

What amount is right for your emergency fund depends on a few different factors:

• Monthly expenses: Once you decide how many months you want to cover, calculate your average monthly expenses. Include essential bills like rent or mortgage payments, utilities, groceries, insurance, and minimum debt payments.
• Job stability: If you have a stable job or multiple sources of income, a smaller emergency fund might suffice. If you’re in a less stable profession or work for yourself, a larger emergency fund may give you peace of mind.
• Family situation: If you have dependents or a family relying on your income, you might want a larger emergency fund to cover their needs as well as your own.
• Risk tolerance: Your emergency fund should contain the amount of savings you need to feel comfortable if the time comes to weather a financial storm. 

READ MORE: How Much Should You Save a Month?

Emergency Fund Examples

Everyone has different needs regarding how much money they need to keep tucked away in their emergency fund. 

Here are two examples that illustrate how emergency fund approaches can differ.

Example 1: Conservative approach with irregular income

Sarah is a freelancer with irregular income streams. She has a mortgage, car loan, and two children. She prefers a conservative approach due to the unpredictability of her income.

• Monthly expenses: $4,000
• Emergency fund ratio: 6 months of expenses
• Emergency fund target: $24,000

Example 2: Moderate approach with steady income

Alex works a stable nine-to-five job with excellent job security. He has no dependents and minimal debt. He's comfortable taking a more moderate approach to his emergency fund.

• Monthly expenses: $3,000
• Emergency fund ratio: 3 months of expenses
• Emergency fund target: $9,000

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Where To Keep Your Emergency Fund

When you’re ready start your emergency fund, you’ll want to keep it in an account that will protect your savings and help it grow. 

We’re fans of high-yield savings accounts for emergency funds. The interest rates are significantly higher than with traditional savings accounts — which means you will earn more money on your savings. Some good options to consider are the SoFi Checking and Savings Account or the CIT Bank Platinum Savings.

You can also keep your savings in a money market account. These tend to offer higher interest rates than traditional savings accounts while keeping your money accessible. 

Shop around with a few banks and credit unions to see who can offer you the highest interest rate, lowest fees, and the banking features you want. 

How To Start an Emergency Fund

If you already have a large amount of savings, you can simply earmark part of those savings for your emergency fund. You may want to open a new savings account to keep your emergency fund separate from your other savings. 

If you get some kind of windfall like a work bonus, tax refund, or inheritance, you can also dedicate that money to your emergency fund.

If you don’t have the amount of money you need, you will have to slowly build your emergency fund. 

Make room in your monthly budget for contributions. If you want to speed up your progress, look at where you can cut back on other expenses.

READ MORE: How To Budget: 5 Simple Steps

FAQs

What is the goal of an emergency fund?

The goal of an emergency fund is to give you a financial safety net if you lose your job or have an unexpected expense. 

With a good safety net, you can buy yourself time to make thoughtful decisions about your career, living situation, or upcoming purchases. You can also avoid problems like being evicted or having your utilities shut off.

How much should I put in my emergency fund per month?

This depends entirely on your financial situation. That said, it’s often recommended to have three to six months' worth of all of your living expenses saved. 

This amount may seem high, but if you lose your job, it gives you time to find a new one without running into financial trouble. 

Don’t worry if you can’t finance your emergency fund overnight. The key is consistency — even small regular contributions add up over time.

TL;DR: Setting Up an Emergency Fund

It’s important to have some money set aside for emergencies. About three to six months’ worth of your living expenses is the general rule of thumb — but anything is still better than nothing. That way, if an unexpected expense pops up, you can still cover it.

Keep your emergency fund in an account that will earn you interest, like a high-yield savings account. That way, you won’t mix your emergency fund with your regular spending money and you’ll be able to grow it faster.

For more money management tips, check out these episodes of the Erika Taught Me podcast:

• How To Budget for Beginners
• Atomic Habits You’ll Actually Stick To
• 10 Steps Towards Financial Wholeness

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