What is an emergency fund, and how much should it be?

Imagine yourself in this scenario. You’re driving home from work one day, and your car’s check engine light comes on. You bring it to the mechanic, who says they can fix it, but it’ll cost a couple of thousand dollars. What do you do?

If you don’t have an emergency fund, it’d be normal for this scenario to fill you with dread as you start looking for ways to borrow money or plan to put the expense on your credit card. If you do have an emergency fund, an account filled with a cash reserve for situations just like this, you can handle the problem without having to worry about going into debt.

Everyone should try to build an emergency fund. We’ll break down how to decide how much to save, how to start saving, and where you should keep your emergency fund.

Key Takeaways

• An emergency fund is a separate account that holds a cash reserve for unexpected expenses.
• Many experts recommend that you keep between three and six months’ expenses in your emergency fund.
• Even if you can’t save that much, having a small amount set aside can be a big help.

How much should an emergency fund be?

There isn’t a set number for how much you should save in your emergency fund. It largely depends on your income, spending, and ability to save.

Most experts say that you should aim to save between three and six months of your typical spending. So, if you spend $5,000 a month for rent, food, gas, and everything else, you should aim to set aside $15,000 to $30,000. That would be enough for you to weather almost any unexpected bill or even losing your job.

Of course, for many people, saving that much can feel unrealistic. Even saving a relatively small amount, such as $500 or $1,000, can give you a good cushion to rely on and help provide peace of mind. You can then start implementing strategies to help you reach your savings goals.

How to set up an emergency fund

Building an emergency fund can sound difficult. Changing your financial habits isn’t easy, but it is worth doing. The important thing, regardless of how you decide to save, is to be consistent. Once you make saving a habit, it gets much easier to stick to it.

There are many different strategies you can use, so consider some of the following.

Cut unnecessary expenses and save the difference

The first thing to do when you’re building an emergency fund is to sit down and make a budget that includes saving for an emergency fund. Think carefully about how much money you make and how much money you spend. Then, consider whether that spending is truly making you happy.

Of course, everyone has bills they have to pay, like rent, debt repayment, food, and utilities, but people spend a lot of money on non-essentials each month. While you don’t have to give up all of your fun spending, think about whether the money you’re spending on things like meals out, gym memberships, or streaming is really making you happy.

Try to cut spending where you can and prioritize spending on what makes you happy while setting aside some money for your emergency fund.

Of course, not everyone does have spending they can reduce or eliminate, so this strategy won’t work for everyone. Instead, consider some other options.

Don’t spend unexpected income; save it

One of the easiest ways to build an emergency fund is to put any unexpected windfalls into a separate savings account. If you get a bonus, tax refund, or gift from a friend or family member, it’s easy to treat yourself and buy something nice.

While you can still put some of the windfall toward something fun, try to put some, or possibly all of it, in a savings account and use it to start your emergency fund. Saving money like this helps you build your nest egg without straining your budget.

Work a side gig

Another good way to build your emergency fund is to boost your income and set aside your extra earnings.

These days, there are a lot of ways to find a side gig that can bring in some extra cash, such as driving for rideshare companies or doing meal delivery. Depending on what you’re good at, you may even be able to find freelance gigs doing things such as illustrating, writing, or coding, so long as it doesn’t break the rules of your current employer.

Side gigs are also nice because you can work as much or as little as you want and stop working when you feel like you’ve saved enough, giving you a flexible way to build or rebuild your emergency fund.

Set up direct deposit

When you build an emergency fund, it’s important to keep the money in a separate account so that you know how much you have saved and you reduce the temptation to spend that cash.

Most employers will let you set up direct deposits to multiple bank accounts, so consider setting up automatic deposits to your emergency fund account. If you set aside even just $25 a paycheck for your emergency fund, you can build your savings over time.

Best of all, by making saving automatic, it becomes much easier to do. You can also consider using the Rocket Money app, which can help you save automatically based on your budget preferences.

Sell some belongings

To kickstart your emergency fund, you can consider selling some of your extra, unused, or unwanted belongings. You can find buyers on apps like Facebook Marketplace, Depop, and Poshmark for everything from old furniture and clothes to electronics.

While this isn’t a sustainable way to build your savings, it can be a good way to declutter your home and start your savings off.

Where should you keep your emergency funds?

It’s just as important to think about where to keep your emergency fund as it is to think about how to build your savings.

The best place to keep your extra cash is in a savings account that is separate from your main checking account. Keeping your savings in a different account makes it much easier to reduce the temptation to dip into it for non-essential expenses. Plus, savings accounts make it relatively easy to access your cash quickly, which is key in an emergency.

When choosing a good savings account, the two key things to look at are the fees charged and the interest paid.

Ideally, you won’t be using the savings much, so look for an account with no monthly fees or fees that are easy to avoid with a small balance. The last thing you want is to have to tap your savings only to find fees have eaten your balance away to nothing.

Accounts with high interest rates are also good because they will help your emergency fund grow over time. Check with multiple banks to find the account that’s right for you.

When should you use an emergency fund?

Emergency funds, as their name implies, are intended to be used for emergencies. They should not be used for splurging or wants, like buying new electronics or going on vacation. Set up separate savings accounts for those goals and leave your emergency fund focused on saving for the unexpected.

Some common things to use your emergency fund for include:

• Car repairs
• HVAC repairs
• Unexpected medical bills
• Offsetting lost income after a job loss
• High utility bills – this can happen unexpectedly if your house has a leak or during very cold months. Ask your provider about financial assistance.
• Home damage repairs 
• New appliances when an old one fails

The bottom line: An emergency fund offers financial peace of mind

Everyone should have an emergency fund. Having cash set aside provides peace of mind and helps you avoid going into debt when you’re hit with an unexpected bill. Aim to save between three and six months’ expenses, but even having $500 or $1,000 set aside can be a big help. To build your savings, try to reduce your spending, take on a side gig, or save unexpected windfalls.

If you’re facing an unexpected bill and haven’t quite built your emergency fund, that’s okay. Consider applying for a personal loan with Rocket Loans.