It’s an unfortunate fact of life. No matter how much you try to do the right things with your money, there’s always the chance that something will happen and throw you off track. You can be the strictest budgeter and make a good income. But that doesn’t mean you won’t get caught off guard with a large hospital bill or an expensive repair that can’t wait.
The difference between whether such emergencies wreck your finances or not can depend on whether you’ve got some savings. Many financial experts recommend an emergency fund for this purpose, and my experiences have shown that this is a wise idea regardless of your current financial situation. Here’s a guide to what you need to know about emergency funds.
What Are Emergency Funds for?
Emergency funds are there to protect you in case you need to pay for a major unexpected expense or emergency. This is money kept somewhere separately from where you have the funds for your monthly bills and everyday purchases. It’s also separate from other savings you have put aside for a new car, your kids’ birthday gifts, and other planned things.
The problem is many people mix up what’s considered an emergency and end up draining their savings for the wrong reasons. While everybody’s situation is different, and being somewhat flexible is OK, an emergency fund is more for taking care of things like:
- Covering important bills, such as the mortgage and utilities, while you’re out of work
- Replacing essential home items, like a furnace that unexpectedly went out in winter or a roof that suffered wind damage from a storm
- Paying unexpected medical bills for yourself, a family member, pet, or other loved one who got injured or sick
- Fixing or replacing the car or laptop you need for work each day
- Paying for emergency travel when a loved one is sick
- Covering certain unexpected kid-related costs, such as emergency childcare
Notice these aren’t expenses you expect to pay for, like normal monthly bills, fun vacations, new clothes, a better phone, and so on. It’s tempting to call something an emergency to give yourself an excuse not to miss out, especially when the money is sitting there. But those needs or wants should be included in your regular budget or saved for in another way.
Why Having This Fund Is Essential
A 2026 Bankrate report noted that more than half (54%) of Americans didn’t have an emergency fund that could pay for three full months of expenses. The majority was at least somewhat worried about covering living expenses if they lost their jobs. While many aren’t prepared yet, an emergency fund can help avoid more headaches if something does go wrong.
On one hand, having one makes the bad situation less stressful. You can just use the money you have saved for the emergency and not need to worry about where it will come from. I experienced this last year when my house’s AC went out on one of the worst days. While I wasn’t happy to pay $9,000 to replace it, it was less of a disaster than if I had to keep sweating.
Avoiding debt is another good reason why you need these savings. A lot of people are probably going to use their credit cards if they don’t have enough savings. Others might apply for new loans or have to hope family will help out. You can easily end up paying off that emergency for months or years. You also have to be careful since borrowing for emergencies often becomes a cycle.
I’ve also found that an emergency fund can help you stay on track for goals. If I had lacked the savings for my AC replacement last year, I might have stopped my retirement contributions while paying off the debt. I would’ve missed out on the growth that might help me retire faster.
Figuring Out How Much To Save
If you’re starting from zero, I think even a few hundred dollars is a good start. Some experts, such as Fidelity, recommend a higher amount of $1,000 to start.
But emergencies can set you back much more than that. Your goal should be to save at least three months’ to six months’ worth of basic living expenses over time. For those in riskier situations, such as self-employment or fluctuating income or expenses, a bigger safety net can make sense as a goal. I’m more comfortable with having 12 months of expenses in the bank.
To figure out the exact amount, you’ll need to look at your bills and know what’s actually considered a basic living expense, such as:
- Mortgage or rent
- Groceries, but not dining out or delivery
- Utilities you can’t go without, but not things like streaming plans
- Car payment and gas
- Insurance premiums
- Health needs like medications or copayments
- Minimum payments on all your cards and loans
- Regular child care
- Other obligations, like child support or alimony
You could total those all up and multiply by the number of months you’re using for your fund. Or you can use the USAA Educational Foundation’s calculator to save yourself some time.
Keep in mind that you might need to revisit that amount if your life situation changes. Becoming a parent or changing to a less stable job might lead you to need more savings, for instance.
Deciding Where To Put the Money
When I started my emergency fund, I made the mistake of letting the money sit in my checking account without any interest for a few years. Since you could be looking at many thousands of dollars, make sure you’re keeping it where it can at least grow a little. I’ve learned my lesson that a regular savings account isn’t right either since mine only offered a 0.01% APY.
A high-yield savings account is a better idea. The key is to find one that doesn’t charge fees and pays much higher interest than regular banks. I’ve had some good experiences, but be prepared that it may be harder to access your money than you’re used to. You have to rely a lot on online transfers. Still, that’s less of a problem if you’re not withdrawing funds often.
You can also look into money market accounts that sometimes come with a debit card. What I don’t recommend is tying up your emergency savings in regular CDs or investments. Those options can leave you with fees or trouble accessing your money quickly.
Building and Using Your Emergency Fund
Once you know how much to save and where, get started putting aside a little money with each paycheck. I did this manually back in the day, but I favor automatic transfers now since that keeps you from forgetting to save anything. Your checking account likely has an option to schedule transfers every so often to a high-yield savings account elsewhere.
But having enough money to save is another issue for some people. Many who don’t have emergency savings are already living paycheck to paycheck and may be digging themselves out of debt. Whether that sounds like you, or you just want some tips for saving more, consider these ideas:
- Get serious about cutting things out of your budget.
- Swap out paid subscriptions for free ones through the library.
- Save any cash from gifts or bonuses.
- Get your tax refund sent to your savings account.
- Use the money from items you don’t need and can sell.
- Take on a side hustle for a while.
I recommend tracking your emergency savings often. That way, you’ll know when you’ve saved enough and can redirect your spare cash to other things. Plus, you’ll see when your fund is going down after an expense and needs to be refilled.
As you use your emergency fund, be careful. If an emergency happens, tapping into that money is justifiable. That’s what it’s there for, which is something I have to remind myself of sometimes. But think through more doubtful purchases. The line between an emergency and something you really want can blur sometimes, so you’ve got to use good judgment.
FAQ
Is it OK to use my retirement account for emergency savings?
If it’s a Roth retirement account and you’ve met the criteria to withdraw money without penalties, it may be an option. It’s less practical for traditional retirement accounts since your emergency withdrawal could mean taxes and penalties. Keeping the money accessible is key.
How much should I save if my expenses often fluctuate?
Using an average monthly expense amount can work. You could also use the highest month’s expense amount to be safe. Having irregular expenses makes things riskier, so saving a little extra is wise.
What should I save for after the emergency fund?
Many people save for major purchases or put more toward their retirement or their kids’ college fund. It’s up to you, so consider your goals and finances, such as whether you have debt that the money could better go toward paying off.
Our articles provide information purely for educational purposes and do not constitute financial, tax or investment advice. You should always consult with professionals like licensed financial advisors or accountants before making any decisions. We aim to provide up-to-date and accurate information, but we make no guarantees regarding the accuracy or completeness of any content. All our examples are provided for illustrative purposes and may not reflect your personal results. We are not liable for any losses or damages arising from your reliance on the information provided.
Sources:
- https://www.consumerfinance.gov/an-essential-guide-to-building-an-emergency-fund/
- https://www.fidelity.com/viewpoints/personal-finance/save-for-an-emergency
- https://www.bankrate.com/banking/savings/emergency-savings-report/
- https://www.federalreserve.gov/consumerscommunities/sheddataviz/emergency-savings.html
- https://finred.usalearning.gov/Money/EmerFundChecklist
- https://www.fdic.gov/consumer-resource-center/2025-01/saving-unexpected-and-your-future
- https://www.alliantcreditunion.org/money-mentor/using-a-roth-ira-as-an-emergency-fund-1
- https://usaaef.org/budget-savings/savings/save-for-emergencies/how-much-should-i-save-for-emergencies/
- https://www.northcountrysavings.bank/blog-article/20-brilliant-easy-ways-save-money
- https://dfi.wa.gov/financial-education/saving-money-tips-and-resources
- https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
