How to Start an Emergency Fund

Regardless of their financial situation, financial security remains a lofty goal for most people. After all, you never know when an emergency will strike that results in a major expense. Having a “rainy day” fund for such emergencies can provide not only the cash you need when you need it but also peace of mind knowing you’re prepared for any unexpected expenses.

What is an emergency fund?

Simply put, an emergency fund is money you can access quickly to pay an unexpected expense. This is not the same as your regular savings. Traditional savings should be for future expenses you do expect: purchasing a new car, paying college tuition, taking a vacation, planning for retirement, and other financial goals.
Emergency savings, on the other hand, pay for such surprise costs as major car repairs, home repairs, medical bills, or emergency travel as well as providing a safety net in the event of job loss. These are true emergencies and by having an emergency fund, you will have enough money to pay for these expenses without running up credit card debt or taking money away from other obligations such as utility bills and groceries.

How much should I have in an emergency fund?

The general rule for an emergency savings goal is to set aside a minimum of three to six months’ worth of living expenses. Although this number may seem daunting at first, especially if money is tight right now, don’t let it overwhelm you. Remember that building emergency savings is a long-term goal, and you can get there if you stick to your commitment to creating an emergency fund.

Steps to building an emergency fund

To successfully set up an emergency fund, you need a plan. Although it might sound easy to save money, if you don’t have a plan of action in place, actually saving money could fall to the wayside. These steps can help put you on the right track for building an emergency fund with results you can see right away.

Set up a budget so you know how much you can save.

Before you can start saving, it’s important to know how much you can save each month. Creating a budget gives you a clear picture of how much money you have each month, and where that money is spent. To create your budget:
  • Write down how much money you bring home each month.
  • Add up all of your regular monthly expenses. This includes living expenses such as your mortgage or rent, utilities, groceries, and gas, as well as additional expenses such as your car payment, credit card payments, and entertainment.
  • Subtract your expenses from your income. This is your discretionary income, money you have to spend as you want.
Budgeting your expenses provides a good look at where you can make adjustments if needed to meet your emergency savings goals. For example, you can stay at home one night each weekend, and save the money you would spend on dinner and a movie. Or you could cut back on one of your streaming services until you reach your savings goal. A few small changes to your expenses could result in big savings for your rainy day fund.

Decide how much to put in your emergency savings each month

Look at your budget to see how much money you can start saving right away. This may be $20 or $200. The amount is not nearly as important as getting started. By doing so, you’ll get in the habit of putting money into your emergency fund so it won’t seem like a hardship. You can always increase how much you save each month as long as you save your stated minimum amount every month.

Use savings tools to boost savings

To help increase your emergency savings, take advantage of the many savings tools now available. For instance, if you receive your paycheck by direct deposit, check with your employer to see if you can have a portion deposited directly into your emergency savings account. Similarly, check with your bank to see if it offers automatic transfers from your checking account to your savings account. If so, you can set up a recurring monthly transfer in any amount to your emergency fund.
Another option is programs and round-up apps that add to your savings. For instance, with Bank of America’s Keep the Change program, any purchase you make with your debit card is rounded up to the nearest dollar with the change going into your savings account.
Savings apps also could help boost your emergency savings, but it’s important to look for one that doesn’t charge fees. For instance, in the Earnin app, you can create a Tip Jar to tip yourself whenever you want. Say you brewed coffee at home and took it to work in a reusable coffee mug instead of swinging by your favorite coffee shop. As a reward, tip yourself with a dollar or two. When you’re ready, transfer your tip jar savings into your emergency fund. It might sound simplistic, but you’ll never miss that dollar and you’ll be surprised at how quickly your savings grow.

Stash away any extra cash

If you earn a bonus at work one month or receive your tax refund, don’t spend it all at your favorite store or restaurant. Instead, take out a small amount for a low-key splurge such as lunch out over the weekend, and deposit the rest in your emergency fund. Giving yourself a small treat means you won’t feel deprived or resentful while providing a boost to your rainy day fund.

Where to keep an emergency fund

The goal of emergency savings is to provide quick access to cash when you need it. Therefore, it’s important to put your money not only where it’s safe, but also where it’s readily available. Also, look for accounts that are insured by the Federal Deposit Insurance Corporation, which protects your money in case the bank fails.

High-yield savings accounts

Unlike traditional savings accounts at your local bank or credit union, high-yield savings accounts offer a better interest rate so you can earn a little extra cash on your money while it’s sitting in the bank. According to the FDIC, the national average savings rate on a traditional savings account is 0.05% annual percentage yield (APY). That translates to just $1 per year on a balance of $2,000.
High-yield savings accounts usually offer a much higher APY, such as Synchrony Bank’s high-yield interest account, which currently offers an APY of 0.60%. That equates to earnings of $12 per year on a balance of $2,000. Although this is still not a huge amount, it is a nice addition to your emergency fund.
When shopping for a high-yield savings account, look for one that does not have any opening deposit or minimum balance requirements, no fees, and quick access to your money. Some accounts offer ATM or debit cards or checks for quick access, while others require a transfer from your savings account to a checking account. Those transfers may take several days to occur, which could hinder access to your funds when you need them.

Certificates of deposit

Depending on the term of your certificate of deposit (CD), you could earn a nice chunk of change on your emergency savings. The longer the term, the better the return. For instance, right now the FDIC lists the national average savings rate on short-term CDs–think between one month and one year–between 0.05% and 0.16%. Rates go up slightly with each year you add onto the term, with a top rate of 0.34% APY on a 60-month CD.
While these fees are fixed and don’t fluctuate like those in a high-yield savings account, your money is tied up and can only be accessed without fees during specific periods during the CD term. That’s not a good choice if you need your money in a hurry.

Money market accounts

Money market accounts are a hybrid between a checking account and a high-yield savings account. Like a high-yield savings account, money market accounts typically earn a higher interest rate than a traditional savings account. That means you’ll receive a small boost to your emergency fund, which can help you reach your savings goal faster.
Similar to a checking account, money market accounts often come with checks and debit and/or ATM cards, providing instant access to your cash. Unlike a checking account, withdrawals from a money market account are usually limited to six withdrawals per month before you incur an excessive withdrawal fee. When using a money market account for your emergency fund, that’s actually a good thing because it will help prevent you from dipping into your account unless it’s truly an emergency.

Online savings accounts

Online savings accounts are similar to traditional savings accounts at brick-and-mortar financial institutions, although many have higher interest rates on your earnings. Some interest rates may rival those for high-yield savings accounts, but not all.
When searching for an online savings account, it’s important to shop around for an account without any opening deposit or minimum balance requirements or fees. In addition, not all online savings accounts offer ATM access to your funds, so getting your money quickly could take a few days unless you also have a checking account with the same financial institution. In that case, you could initiate an online transfer from your savings to your checking account for same-day access to your money.

CD Calculator


Mistakes to avoid

The journey to building an emergency fund might be long for some and short for others. Regardless of how long it takes, though, it’s important to stick to your plan, and avoid any pitfalls that could derail your savings.

Spending money when it’s not an emergency

Once you start to accumulate money in your emergency fund, it can be tempting to use some of that cash for a purchase you don’t need. Always keep in mind your emergency savings are for unexpected expenses that pop up out of the blue. This doesn’t apply to the latest edition of your favorite gaming system, limited tickets to a sporting event or a last-minute beach retreat with your friends. You can certainly save up for those expenditures, but it should be done in your regular savings, not your emergency fund.

Not replacing withdrawals

When you do dip into your emergency fund for a qualifying expense, don’t forget to replace that money when you can. By doing so, you’ll stay on track for reaching your savings goal, which helps make sure you’ll have that money when you need it again.

Stopping when you reach your initial goal

Reaching your initial goal for your rainy-day fund will be a major milestone, one that you should celebrate. However, once you do, take the initiative to set a new savings goal. After all, you don’t know what the future will bring, so the more money you set aside in your emergency fund, the better prepared you will be. Also, this ensures you won’t need to divert savings from your traditional savings account, so you can use those funds for the things you really want.

The bottom line

Starting an emergency fund can seem daunting, especially if money is tight, but it doesn’t have to be. Setting a goal for your emergency savings, and creating a plan to achieve that goal go a long way in making your emergency fund a reality. By budgeting how much you can put into your rainy day fun and using savings tools such as automatic deposits and round-up programs, you’ll be surprised at how quickly your balance grows.
Finding the right place to keep your emergency fund in order to take advantage of additional savings through earned interest also is key to achieving your savings goal. Of course, avoiding mistakes such as spending your emergency funds on non-emergency purchases also will go a long way in helping you build your emergency savings.
At first, it might seem like a struggle to start and build an emergency fund, but when you have the money you need when surprise expenses hit, you’ll be both relieved and proud of your accomplishment.

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