What Is an Emergency Fund, and How Much Should You Keep In It?

An emergency fund is an amount of money you save, often in a savings account, designed to cover unplanned expenses such as:

• Loss of income
• Emergency medical expenses
• Major home or car repairs
• Major home appliance replacement

Your emergency fund should hold enough money to cover these unexpected costs without making a dent in your monthly budget.

The exact amount you need to save depends on your income, your expenses, where you live, and your family situation. While you can’t always anticipate when something will happen, you can prepare for it with an emergency fund.

Dealing with an emergency can also take up a lot of your time and be emotionally draining. Having money on hand can help you avoid additional financial stress and deal with the problem head-on. You can then take steps to move forward.

Life is unpredictable. You never know when you’ll experience job loss, an illness, an expensive car repair, or other unplanned costs.

When you’re faced with one of these unexpected emergencies, you can fall back on your emergency savings fund instead of relying on your credit card and potentially getting into debt.

Without an emergency fund, you may have to resort to one of the following options to cover an unanticipated expense:

• Using high-interest credit cards
• Taking out an unsecured personal loan
• Dipping into your retirement accounts
• Borrowing from friends or family
• Making severe spending cuts in your monthly budget

An emergency fund is a proactive way to plan for unpredictable financial situations.

There’s no time like the present to start building your emergency fund. Here’s how to do it.

1. Calculate your expenses and set a savings goal. First, write down your regular monthly expenses so you can decide how much you should save each month. Set a goal and make a realistic plan to reach it. This might include cutting back on spending in certain areas until you reach your emergency savings goal.
2. Open a high-yield savings account. It’s wise to have a separate account for your emergency fund. A high-yield savings account can grow your money even faster than a traditional savings account.
3. Automate your savings. Look for an account that offers automatic savings by saving a percentage of your paycheck or rounding up your purchases and saving the change.
4. Save any unexpected windfalls. If you receive a tax refund or a bonus from work, stash it in your emergency savings account to reach your goals faster.
5. Review your savings regularly. Keep an eye on your emergency fund and adjust as needed. For example, you could bump up your contributions if you get a raise at work.
6. Consider where to put your money once you reach your savings goal. Eventually, you’ll reach your emergency savings goal and can allocate the money you were contributing elsewhere. Consider increasing contributions to your retirement accounts or investing the money.

How much should I have in an emergency fund?

The amount of money you should have in an emergency fund depends on your lifestyle. To help you decide your emergency fund amount, take these questions into account:

• Do you have debt?
• Do you have kids?
• Do you live in an area with a high cost of living?
• How much money do you need to pay monthly bills and basic expenses?
• Do you have a car?
• Do you have pets?

A single person living in a low-cost-of-living area may have a smaller amount of emergency savings than someone with a large family who lives in an expensive city like New York or San Francisco.

An emergency fund calculator can help you determine your ideal emergency savings goal.

Some financial experts suggest having $1,000 in an emergency starter fund and then working towards three to six months’ worth of expenses.¹ Others recommend saving up to 12 months’ worth of living expenses during times of economic uncertainty.²

Another way to determine how much to save is with the 3/6/9 rule:

• Save three months of expenses if you’re single or partnered with no children or other dependents.
• Save six months of expenses if you and your partner have steady incomes, a mortgage, and one or more children.
• Save nine months of expenses if you’re the sole earner in your family or if your income is irregular.

The best place for an emergency fund is a savings account – in particular, a high-yield savings account (HYSA). Here’s why.

• Earns interest. Savings accounts earn interest so you can grow your money faster. HYSAs have higher interest rates than regular savings accounts to help you reach your financial goals even sooner.
• Easily accessible funds. Your emergency fund needs to be easy to access when you need it. Savings accounts contain liquid assets, which means you can access the money quickly when faced with a financial emergency.
• Your money is safe. Most savings accounts are federally insured through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).^3,4 This means your money is protected in the event your bank or credit union fails.

Other options for your emergency fund include money market accounts (MMAs), certificates of deposit (CDs), and cash management accounts.

An emergency fund is an essential part of your financial wellness. When you focus on your financial health, you can avoid extra stress when you’re faced with unexpected expenses.

Learn how much you should have in your emergency fund to cover a car repair.