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How an Emergency Fund Keeps You Prepared for the Unexpected

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We’re told to expect the unexpected. Let’s prepare for it instead. 

Whether it’s a looming recession, an unexpected medical bill, or a surprise opportunity, an emergency fund is your most important tool for navigating life’s changes.

“There are plenty of reasons why emergency funds should be used; everything from medical expenses to getting out of an unhealthy relationship,” says Jannese Torres, a nationally acclaimed Latina money expert and founder of the Yo Quiero Dinero podcast. “There are so many things life can throw at you and giving yourself permission to use those funds is important.” 

Even a couple of hundred dollars in savings can help American families avoid hardship when faced with disrupted income, research from the Urban Institute shows, and low-income families with $2,000 to $4,999 saved are more financially resilient than middle-income families without savings. 

But for many Americans, the reality is much less certain. Nearly four in 10 Americans would be unable to cover an unexpected expense of $400 with cash or its equivalent, according to data from the Federal Reserve. 

What’s more, neglecting your savings can dim your financial outlook in the long term —  particularly when tough times come, an especially prescient issue today. According to a July 2022 survey by McKinsey & Co., two-thirds of consumers are responding to this year’s rising inflation by “managing their balance sheets, with most reducing savings to cover expenses.” 

You don’t have to wait for a looming recession or lower prices to begin saving money. Even if you’re already facing income disruption or financial hardship, you can begin setting aside cash for the future. 

This guide will help you make the most of an emergency fund —  from building a savings mindset to becoming financially resilient. 

Emergency Fund Basics

You might already have a savings account you contribute a few dollars to occasionally, or even a dedicated fund to save up for your down payment or dream vacation. 

An emergency fund is not to be confused with an account you dip into occasionally for nonessentials. Your emergency fund should be a designated reserve of several months’ living expenses kept in a safe, accessible account that you only withdraw from in case of emergency.  

This fund is your peace of mind in changing tides. In other words, a safety net.  

“Unplanned expenses can happen at any time, and nothing helps you sleep better at night than you knowing you have some money put away just in case,” says Greg McBride, CFA, chief financial analyst at Bankrate.com. Like NextAdvisor, Bankrate is owned by Red Ventures.

Experts have different opinions on how much you should have in your emergency fund. Most recommend having three to six months’ of living expenses saved. But like any financial decision, only you can determine the number that’s going to make you feel secure.  

Your financial outlook is based on several factors and will change a lot over your lifetime. The number that makes you feel secure now is most likely not going to be the same ten or 20 years down the line.

Think about it as taking stock of your financial health, which the Urban Institute defines as your “ability to manage daily finances, be resilient to economic shocks, and pursue opportunities for upward mobility.”  

It’s important to regularly review the factors that contribute to your financial health. Here’s a non-exhaustive list to consider:

  • Your current income and job stability
  • Your expenses (monthly, annually, etc.)  
  • Your debts  
  • Your future plans 

Having a clear picture of your current financial outlook will help you readjust your priorities now and in the future.  

Your emergency fund should be a designated reserve of several months’ living expenses kept in a safe, accessible account that you only withdraw from in case of emergency.

What Are Emergency Funds For? 

You might not think much about your emergency fund when everything is smooth sailing, but the true value may soon become clear when you need it.

The reality is, “you’ll have good years and bad years,” says Niv Persaud, CFP, founder and managing director at Transition Planning & Guidance, LLC. “So, you really have to look at your long-term goals. When it comes to your lifestyle, you have to think not just about now, but about how you envision your life moving forward. Maybe you’ll end up going back to school or relocating to a different country.”

Here are a few cases in which you might dip into your emergency savings:

  • Job or income loss
  • Medical emergencies
  • Unexpected home repairs
  • Car repairs
  • Family emergencies
  • Unexpected tax bills

It might feel pessimistic to plan for a medical emergency or a layoff, but it’s also reassuring to know you have a safety net in case you need it. Plus, the situation doesn’t always have to look so dire for you to benefit from an emergency fund. Your emergency fund is also helpful for unexpected opportunities, finding financial peace, and reaching big life goals.  

“Reducing expenses and increasing the gap between your earnings and your expenses is how you build wealth and actually enjoy today and tomorrow more,” says Jeremy Schneider, founder of Personal Finance Club. “While I love talking about building wealth before you can do that, you need a financial foundation on which you can build.” 

Alternative Types of Emergency Funds

Emergency Funds as Solutions Funds

With ‘emergency’ in the name, feelings of stress and anxiety are bound to surface when it comes to saving. Some experts are using language to change that.

“I’m reframing the term emergency fund. It’s incredibly triggering, and fear is rarely a good motivator,” Delyanne Barros, an attorney turned millionaire money coach recently told NextAdvisor. “Instead, I’ll be calling it a solution fund because that’s how I see money. It’s a problem solver. A stress reducer. A convenience provider.” 

Family Emergency Funds 

Having an individual emergency fund is great, but what if your loved ones need assistance? Torres experienced this first-hand.

“My first instinct was to pull money out of [my emergency fund] to help my family,” Torres previously told NextAdvisor. “But what if I emptied out my emergency fund to help my family, and then couldn’t handle my own emergencies?”  

Now, Torres budgets for both family assistance and her own emergency savings in her financial plan. A family emergency fund, which is separate from your individual fund, will allow you to support loved ones without burdening your budget.  

Why You Need An Emergency Fund

However you like to think about emergency funds, the most important thing is that you are thinking about them now. 

While it can be overwhelming to think about compiling several months’ worth of expenses in the event of an emergency, the peace of mind it brings pays in dividends. 

Emergency funds are a way to prepare for whatever circumstances your future may bring.

If you’re already short on cash, a single unexpected expense could adversely affect your overall financial health. Even a modest emergency fund can help you avoid lasting consequences when an emergency or opportunity arises. Experts agree everyone should work towards an emergency fund, but a savings safety net can be especially impactful if you fall into one or more of these categories: 

  • You have family or others who depend on you financially 
  • Job security is an issue for you (if you’re self-employed or do contract work, for example)
  • If you want to start investing and build wealth 
  • If you’re working towards being debt free or financially independent 

Emergency funds are good for your wellbeing

Financial stress takes a real toll on both mental and physical health. 

“You should be saving for emergencies, not just because we told you to, but because it’s very stressful living paycheck to paycheck. Having that cushion can remove a lot of anxiety that surrounds your daily life,” says Summer Red, accredited financial counselor and senior educator at the Association for Financial Counseling & Planning Education (AFCPE).

When Red moved across the country for a job, she says she spent pretty much everything she had. 

“I was building up from almost nothing and I got a speeding ticket for $80. I had no idea how I was going to pay it. That’s when I realized I never wanted to be in a situation where I was panicking over $80 ever again,” Red says. 

With an emergency fund, you don’t have to compromise your financial stability or peace of mind. 

You need an emergency fund if you want to build wealth

Building long-term wealth doesn’t happen overnight, nor can it happen solely through investing. An emergency fund can help you lay the groundwork for growing your wealth over time.

“If you’re building a skinny tall tower, it’s going to tip over at the slightest breeze because you don’t have the foundation of paying off your debt and establishing an emergency fund,” Schneider says. 

To build wealth, you need a strong foundation: your emergency fund. Across the board, experts stress the importance of establishing an emergency fund before putting extra money toward investments. 

“The reason why it’s so important for beginner investors, especially young investors, is that in the event of a recession, the biggest risk isn’t ‘Oh my gosh, I’m not going to be able to retire.’ The biggest risk is that you might lose your job and you’ll need cash to live between jobs,” says Shang Saavedra, personal finance blogger and founder of Save My Cents, LLC. 

In a situation where you need immediate cash, you’ll want to have that cash safely parked in a savings account, available to draw from at a moment’s notice — not invested in the stock market where it might lose value at any time. 

How to Build Your Emergency Fund

The first step to building your emergency fund is saving. 

Savings contributions aren’t as glamorous as massive returns on investments, but they are crucial to your financial health.

Think about it like this, you don’t have to save, you get to. “The concept of having money set aside is such a privilege,” Torres says.

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When Kaila Jefferson, 28, moved to Atlanta, GA, she was looking to expand her career opportunities as a young Black professional. She quickly landed a full-time job in her field, but the costs of graduate school and moving made a huge dent in her savings.

Kaila Jefferson, 28, saved an emergency fund of $10,000 in just three months after moving.

Living on her own in a new city, Jefferson was concerned about how she would handle a future emergency. So, Jefferson set a goal for herself: save $10,000 in three months

Jefferson shared with NextAdvisor her three-pronged strategy for hitting this goal. The first step was to limit her discretionary spending- which had been going to regular nail and hair appointments as well as dining out. But just limiting her spending wasn’t going to be enough.

So Jefferson began to boost the income from her full-time job with side-hustles. Turning a life-long passion for skin and haircare into a successful YouTube channel, Jefferson was able to boost her total amount saved to around $2,000 to $4,000 a month. 

The third part of her savings plan was budgeting. Planning for every expense helped Jefferson stay on track to hit her goal of $10,000.

Even when she was hit with unexpected medical bills and car repairs, Jefferson was able to rely on the money she saved from her YouTube channel and didn’t miss a beat. 

READ MORE: How This Entrepreneur Saved $10,000 in Three Months, and What It Means for Her Now

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Here are some tips for building a savings habit and simplifying the process:

Make saving a habit

One of the most universal pieces of financial advice you’ll get is to make saving a habit — and your emergency fund is a great place to start. Whether your goal is to become debt free, join the Financial Independence, Retire Early (FIRE) movement, or hit it big in the stock market, saving is the bedrock of your financial outlook. 

“No matter how small you start, even if it’s $1 a week, having savings as a part of your budget will help you build that long-term habit. From there, you can achieve financial stability and hopefully start to accumulate assets,” Red says.

Think of establishing a savings habit like strengthening a muscle. Consistency will get you farther, and help you become stronger, than a one-time contribution or workout. 

Automate your savings

However, just like working out, sometimes it’s hard to convince yourself to save. 

“One of America’s favorite pastimes is spending money,” Jeffrey Roach, chief economist at LPL Financial, a national broker-dealer, recently told NextAdvisor

You’ve probably heard the saying, “Out of sight, out of mind.” When it comes to saving, the idea is that if you’re not seeing the money, you won’t be tempted to spend it. 

In the world of modern banking, the way you can do this is through automation. 

“I automate everything. If it wasn’t for autopay and direct deposits, I really wouldn’t have as much saved as I do now,” says Krystal Todd, CPA and the creator of The Cash Compass. “I don’t even think about it. I don’t touch it and I don’t really look at it.” 

You can usually set up autopay through your savings account. You’ll choose the amount you want moved over from another account and the frequency of the transfer. Depending on your budgeting and spending habits, maybe it makes sense to move a certain amount every month, or every bi-weekly pay period. Just make sure you have enough money in the other account to complete the automated transfer.

If it’s available to you, automate everything you can, even beyond savings. If you’re constantly forgetting to pay your credit card bill or other important payments, autopay can help you avoid going into or adding to your debt load.

Managing debt while saving

If you’re struggling with debt, putting off your savings commitments can feel like the necessary choice. In many cases, experts recommend otherwise. 

“People will ask me, ‘Should I pay off my debt? Should I invest? Or should I save for emergencies?’ My answer is always ‘Yes.’ You don’t have to do all three of them equally but you should treat each of them as a commitment.” says Todd Christenson, author of “Everyday Money for Everyday People.” 

If an emergency comes and you have no savings, you’ll have no choice but to add to your debt. One of the reasons to save is so you can stop adding to that debt load.

But it’s important to find a balance between saving and managing your debt. Consider how much you need the savings versus how much you need to pay down the debt —  and you can adjust your priorities as time goes on. The most important thing is that you consistently work towards those goals.

“If you don’t do all three of them now, you won’t do all three of them later. As soon as you get out of debt, you’ll go right back into debt because you won’t have the habit or commitment to save or invest,” Christenson says. 

If you have high-interest debt, like credit card balances, it can help to put more of your effort toward the debt to avoid racking up exponential interest rate costs. Consider saving a baseline amount that feels doable to you, and then start tackling your debt balance. Then, when your debt is paid down, you can put that monthly payment toward your savings instead.

When to Use Your Emergency Fund

Once you’ve established your emergency fund, you’ll have to manage the decision of when to use it over time. Sometimes the decision is simple, but other times it’s not as clear. 

“One of the challenges for people who never had savings, but have now built an emergency fund, is giving themselves permission to use it,” Red says. “The emergency comes and the thought of spending all they’ve saved is really traumatizing.” 

At the end of the day, your emergency fund is designed to safeguard your financial health. Don’t go into debt or borrow money to cover essential expenses that your emergency fund could pay for.  

The decision to tap into your emergency fund should be based on your current financial situation.

A non-comprehensive list of reasons you may want to tap into your emergency savings:

  • Loss of income
  • Medical emergencies
  • Unexpected auto or home repairs
  • Opportunities

When Krystal Todd’s daughter needed to have emergency surgery, Todd was met with a $12,000 medical bill —  even after insurance coverage. She thought about tackling the bill through multiple payments, “But, I knew I would be miserable having to take care of five different bills coming in from different people. I decided to dip into my emergency fund to tackle some of the costs,” Todd says. 

At the time, Todd says she only had about two months worth of expenses in her emergency fund, so she didn’t want to fully drain the savings. “I just wanted to get that $12,000 bill to a smaller number I could comfortably fit into my monthly budget,” Todd says. 

Replenishing your emergency fund

Equally important as building your emergency fund is replenishing it after you need to use it. This not only ensures the sustainability of your emergency fund but can also ease the anxiety around using it.

“It’s sort of like water dripping into a bucket. If you need a scoop of that water, it’s okay because there’s always some going into it,” Red says. 

The same strategies you use to establish your emergency fund will make saving even simpler when it’s time to restock your emergency fund. 

After her experience, Todd is now even more diligent about saving regularly. Her daughter’s emergency surgery was a real learning moment and she now has over nine months’ worth of expenses in her emergency fund. 

When Not to Use Your Emergency Fund

You should use your emergency fund when you need to, but not necessarily every time you want to. 

“It’s there for medical emergencies, loss of income, those sorts of things,” Christenson says. “It’s not for social emergencies, like going out with your friends or taking a vacation. You need to plan for all these other things outside of emergency savings.”

An emergency fund can help you out with anything life throws at you that you need a “solution” for. 

Sinking fund vs. emergency fund

If you are constantly tempted to use your emergency fund for nonessentials, start a sinking fund in addition. Sinking funds are savings for specific purposes, like a vacation or home renovation —  things you want but don’t necessarily need. By contributing each month to your sinking fund, you won’t be tempted to dip into your emergency fund for non-essentials.

Just remember, your emergency fund should be in a good spot (or you’re contributing to it regularly) before you put your extra money toward a sinking fund. 

“Maybe you’re tired of your job and want to move on, or maybe you want to start your own business. Rather than immediately taking a leap of faith, establish an ‘I hate my job’ fund to support that move,” Todd says. “It’s about taking a calculated leap of faith, instead.”

Here are a few ways to utilize a sinking fund:

  • Holiday shopping or birthday gifts
  • Vacations
  • Furthering your education
  • Big ticket purchases like a TV or computer
  • Down payment on a new home or car   

A good rule of thumb is if you can plan for an event, you shouldn’t dip into your emergency fund to cover its expenses. The only thing you can know about emergencies is that they happen. No one can predict when they’ll occur or what they’ll look like, only that they’ll require a solution. That solution is almost always going to require money, and potentially a lot of it.

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Just three months before the start of the COVID-19 pandemic in 2020, Erin Lowry, a personal finance expert known as The Broke Millennial, broke one of her own rules

Personal finance expert Erin Lowry (the Broke Millennial)

For Lowry and her husband, Peach, the thrill of being debt-free was undeniable. But “within the first two weeks of COVID-19, our household lost $10,000 of expected income as media outlets froze freelance budgets and speaking gigs were indefinitely postponed,” Lowry writes

Unsure of how long the pandemic would last, Lowry wanted to avoid drawing down their emergency fund any further. So, they shifted to a “Bare Essentials Budget” and directed all savings to their emergency fund. 

“Before the pandemic, I typically recommended between three and six months worth of living expenses. Now, a year’s worth feels much safer. A challenging goal, to be sure, but one worth pushing towards if you don’t feel secure in the stability of your job,” Lowry writes.

READ MORE: We Raided Our Emergency Fund to Become Debt-Free. Then the Pandemic Hit

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Once you know when and how to use an emergency fund, the next step is to start saving. Here’s how to decide where to keep your savings, and how much you should have:

Where to Keep Your Emergency Fund

Choosing the right account for your emergency fund can be a great help in maximizing your savings — and who wouldn’t want that? 

You’ll want to consider three things to start:

  • Accessibility 
  • Security
  • Your own spending habits and financial situation

The best place to keep your emergency fund is in an account that you can access quickly if you need to and that keeps your money secure — not subject to market volatility. Many experts recommend high-yield savings account because they’re both easy to access and secure, and can help you earn a little extra on your balance. In today’s rising rate environment, you can earn nearly 4.00% variable APY on some high-yield accounts. 

But remember, your emergency fund is the foundation upon which you build wealth. It’s not how you build wealth.“Don’t look at them like wealth-building accounts. People will say, ‘Well, I’m not going to make any money on that,’” Christenson says. “That’s not the point.” 

We asked a few of our NextUp honorees to weigh in on where they keep their emergency funds. They also offered advice on where to keep yours —  and not one of them recommends the piggy bank. 

Jannese Torres 

Jannese Torres

Where she recommends keeping it: “I love a high-yield savings account because they do take a little bit more effort to pull those funds out. You don’t have a debit card, you can’t just walk up to an ATM and get the money out right away. So, putting those barriers in place for yourself, especially if you’re someone who gets a bit trigger-happy with your debit card, I think is really helpful.”

Shang Saavedra

shang saavedra

Where she recommends keeping it: “The one thing I would say is don’t invest your emergency fund. Emergencies typically tend to happen when the economy’s bad. And when the economy’s bad, the stock market is not doing great. I think a high-yield savings account is a great option, but don’t think about your emergency fund as something you need to grow. Because, over time, it’s not going to matter relative to the size of your retirement fund. Just park it somewhere where it’s easy to access. Not too easy, but so that it’s cashable.” 

Jeremy Schneider  

jeremy schneider

Where he recommends keeping it: “It shouldn’t be invested. If it’s invested, it’s not your emergency fund. It shouldn’t be in a tax-advantaged retirement account because you might have trouble accessing it. But as long as you don’t invest your emergency fund, it doesn’t matter very much. Personally, I use a Fidelity Cash Management account, which basically gives me a market rate of interest- so it’s similar to a high-yield savings account. But, it comes with a debit card and check-writing ability.” 

Krystal Todd

krystal todd

Where she recommends keeping it: “If you’re someone who might not have as much discipline, but you’re trying to build that savings muscle, I recommend putting it out of reach, but still within reach in case of an emergency. In the beginning stages for me, I put my money directly into a credit union that didn’t have branches near me nor did they have online banking options. So to get that money was a bit of a mission, but I could access it if I really needed to.” 

Savings Account Options

High-yield savings account

High-yield savings accounts are interest-earning savings accounts most often offered by online banks or online-only branches of larger banks. Since they don’t have brick-and-mortar branches, they can offer much more interest value. In fact, high-yield savings accounts with some of the best rates today can offer more than 10x the average traditional savings account. 

Traditional savings account

Most, if not all, brick-and-mortar financial institutions offer traditional savings accounts. If you already have a relationship with the bank, opening a traditional savings account with them can be very convenient. However, you’ll earn very little interest on your savings; many banks today only offer 0.01% APY on regular savings.

Certificate of deposit

A certificate of deposit (CD) is a deposit account that requires you to leave your money for a set period of time, with a set interest rate. The main benefit of a CD is that your money grows over time with fixed interest, usually higher than a typical savings account. 

However, you must pay a penalty for early withdrawal (typically equal to a portion of interest earned), meaning this account might not be the best option for the bulk of your emergency savings. There are some more flexible CD types that could be better options, like no-penalty CDs.

Money market account 

A money market account (MMA) is very similar to a high-yield savings account. It offers a higher interest rate than your traditional savings account, but it has some added flexibility in accessing and using your funds, such as the option to use a debit card or write checks. If having easy access to your emergency fund means you’ll be tempted to use it for non-emergencies, a MMA might not be the best option for you. 

Series I savings bonds

Series I bonds are connected to the inflation rate. They were all over the news in 2022 due to their record 9.62% interest rates, but the rate has recently dropped to 6.89%. 

Savings bonds are considered one of the safest investments you can buy, however they might not be the best place to store your emergency fund — at least not all of it. You need to hold them for at least a year, and if you redeem them after less than five years, you’ll lose out on the previous three months of interest. 

How Much Should You Have in Your Emergency Fund?

Typically, experts recommend you should have at least a few months’ worth of expenses as the ultimate goal for your emergency savings. But the actual amount can vary greatly, depending on the broader economic environment, your own income stability, how many dependents you have, and even your own comfort level with your savings. 

To help you begin thinking about your perfect number, here are a few more recommendations from NextUp honorees about how much they keep in their emergency funds, as well as what their recommendations are for others. 

Jannese Torres

  • 1 year’s worth of emergency funds. “It’s what helps me sleep at night.”
  • How much she recommends: Three to six months is a great place to start, but you have to start tweaking it and making it custom to your situation

Shang Saavedra

  • 1 year’s worth of expenses
  • How much she recommends: “A good rule of thumb for most people would be to have three to six months of must-have expenses. But if you already have credit card debt, even one month of expenses is good enough. The goal is really to break the paycheck-to-paycheck cycle.”

Jeremy Schneider

  • $10,000 to $20,00 in emergency savings
  • How much he recommends: Three to six months. “If it’s less than three months, you might be cutting it pretty close. But, if it’s over six months, you might be paying too much opportunity cost. Some of that money might be better off in investments.” 

Krystal Todd

  • 9 months’ worth of “core living expenses”
  • How much she recommends: “There’s no right answer … Go by the last major emergency you had and how much it cost. That’s a pretty good baseline.” 

You really have to take into account your personal situation. Are you a single parent? Do you live in a high cost of living area? Do you have a partner? Do you have family members who might be relying on you for income?

Jannese Torres

An Example Emergency Fund in Action

Your emergency fund doesn’t have to mirror the experts for it to be correct. What’s important is that your emergency fund works for you based on your financial picture, not anyone else’s. Emergency funds come in all different shapes and sizes. 

Let’s look at a few hypothetical situations: 

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Meet Sandra. She’s 22 years old and makes $40,000 a year. In a typical month, her cost of living is around $2,000. Sandra recently moved home to live with her parents. Since she’s able to work remotely, Sandra doesn’t plan on moving out until rental rates drop a bit. But, she has monthly car payments and student debt to consider. In Sandra’s case, three months’ worth of expenses adds up to $6,000, a number that feels comfortable given her current cost of living. 

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Now, let’s say hello to Alex. Living in Silicon Valley, CA, Alex works in technology and is a single parent to two kids in a private school. On top of their children’s tuition, their monthly mortgage payment is $10,000. Alex’s monthly expenses fall somewhere around $25,000. Given their financial outlook, Alex shoots for more than six months worth of expenses in their emergency fund —  around $150,000. This is a number that helps Alex sleep at night, knowing they can support their children in the event of job loss or medical emergency. Alex also likes to bucket their savings into categories, so they can better visualize their savings progress. 

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Finally, let’s pay a visit to Maryann and Tony. After working full-time for the past 40 years and raising three daughters, they are itching to retire. However, after purchasing their retirement home, Maryann and Tony want to add some cushion to their retirement savings. Since their mortgage is paid off, the pair is focused on supplementing their emergency fund so that they don’t have to worry about over-withdrawing from their retirement accounts. Since they’ll no longer be working, Maryann and Tony are saving for at least a year’s worth of expenses—  a six-figure number — in their emergency fund. 

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Calculate This For Yourself

Now it’s your turn. Take a few minutes to plug your information into this formula to get a ballpark figure for your emergency fund. 

Determine your monthly essential expenses (groceries, rent/mortgage, car, utilities, etc.) and how long, in months, a potential emergency might last for you. Then, multiply your monthly expenses by your expected emergency duration to determine your target emergency fund amount. 

Necessary Expenses X Period of Time = Estimated Emergency Fund Goal

How to Approach a Crisis without an Emergency Fund

Saving can be hard. There’s a fair chance that despite your best efforts, you are not in a position to save. Or, an unexpected cost may arise when you’re just starting to build your emergency fund.

It doesn’t mean you’re irresponsible or careless when it comes to your personal finances. Lack of education, financial literacy, access to stable income, and wealth-building tools are all real barriers that impact one’s capacity to save. 

“The concept of having money set aside is such a privilege. When I think of the position so many Latinos and people of color find themselves in, we’re technically being asked to pursue the American dream on 50% of the budget. And that’s a daunting place to start,” Torres says. 

If setting aside money for an emergency fund is not feasible, there are still things you can do to get through a crisis or loss of income

Communicate and ask for help

The first step is to talk about it. Reach out to your circle of family and friends to see if there’s anyone who can potentially lend support.

“I think there’s a lot of shame in asking for help, but at the end of the day, a lot of people are willing to. You just have to let them know that something’s going on,” Torres says. 

Rather than taking out a loan and potentially adding to your debt load because of high-interest rates, see if you have any family or friends willing to lend you the money. Some of them might even have family emergency funds set up for this very purpose. 

Another option is to look into charitable or non-profit organizations in your area. There are some organizations dedicated to helping people with things like rent and utility payments in times of struggle. 

Tighten your budget

Even if you don’t have an emergency fund to dip into, it’s important to determine your bare-bones cost of living —  which likely consists of mortgage or rent payments, food, utilities, and medical care. 

Take a closer look at your budget and see if there are any places you can trim down. Maybe you can cancel that extra streaming service or cut back on dining out.It just takes discipline. 

Supplement your income

If you’re living paycheck to paycheck, saving money for an emergency that might not happen can be hard to justify. “You can only squeeze so much out of a paycheck that is going towards all the bills,” Torres says. “So you’ve got to find ways to increase your income. I’m a big fan of side hustling.” 

Finding gig work is easier than ever these days. Torres recommends taking a look at apps like Uber, Instacart, or Rover to see what you can do for a couple of hours a week to supplement your income. 

For Jefferson, “Having more than one source of income has been the biggest key to saving that amount of money in such a short amount of time.” 

Lastly, have compassion for yourself and for others. We are not all on the same playing field when it comes to money —  far from it. It’s a privilege, not a virtue, to have the capacity to set aside money for an emergency fund.  

5 Steps to Starting Your Emergency Fund

  1. Know the benchmarks
    • Recommendations vary on how much you should have in your emergency fund, but the general consensus is about six months’ worth of living expenses. The amount is subject to change depending on your circumstances. 
  2. Set a personal savings goal
    • Your emergency fund is about decreasing stress, so avoid putting pressure on yourself to have it fully funded overnight. Instead, focus on consistent contributions over a long period of time and you’ll be hitting those savings milestones before you know it. 
  3. Evaluate your expenses
    • Pin down what your essential expenses are; recurring expenses like rent or mortgage payments, groceries, and utilities likely account for most of them. To adequately prepare for an emergency, you need to know exactly how much money it takes to keep you afloat even after you’ve cut back on your discretionary spending. 
  4. Revisit your plan
    • As you hit savings milestones or your life situation changes, revisit your plan and assess whether it’s still the best fit for you. Maybe you’ve expanded your family or gotten a raise. Whatever the situation, it might mean getting more aggressive with your savings or realizing you’re in a position to pull back a bit. 
  5. Choose the right account 
    • When deciding where to keep your emergency fund, focus on safety and accessibility. Beyond that, you’ll want to consider your own spending and saving habits. When an emergency comes, being able to access your savings is key. However, you don’t want your reserve to be so easily accessible that you’re tempted to use it for non-emergency purposes.

Emergency Fund FAQ

Is $1,000 enough for an emergency fund?

$1,000 might be enough for your emergency fund, but it depends on a few factors. Since your emergency fund is designed to cover essential expenses in the case of income disruption, consider how long it would take you to find a new job if you were to be laid off. Other factors that go into your emergency fund number include whether you support anyone else financially, your cost of living, and overall financial picture.

Are online savings accounts safe?

Yes. When choosing a bank for your savings account, check to see whether they are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Accounts protected under either organization are insured up to $250,000. Your money is also safe from market fluctuations since you’re not taking on any investment risk.

What are some other high-yield savings options?

In addition to high-yield savings accounts, two comparable options are money market accounts and CDs.

Why do online banks pay more interest?

Because they have no physical bank branches, online banks have fewer overhead expenses than brick-and-mortar financial institutions. As a result, these banks can pass along those savings to customers (and add incentive for new customers) in the form of higher interest rates and lower fees.

What are the different types of savings accounts?

There are two primary account types to consider if you’re looking for a  low-risk savings option: high-yield savings accounts and traditional savings accounts.

When should you use an online savings account?

Online savings accounts are a great place to store money you don’t need regular access to, which makes them prime real estate for your emergency fund. Money you need immediate access to, say for daily expenses, should be kept in a checking account. Online savings accounts are great for emergency funds and saving for long-term goals, like a down payment.

Do I have to pay taxes on my savings account?

You don’t have to pay taxes on the money you deposit into your savings account, but the interest you earn on your balance is taxable. Your bank will issue a FORM 1099-INT before tax season begins, which you can use to report any interest you earned throughout the year on your tax return.

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