What Is An Emergency Fund, And How Much Should It Be?
4-Minute ReadPUBLISHED: February 17, 2020 | UPDATED: January 30, 2023
Even with the best-laid plans, unplanned expenses are an inevitable part of life. For this reason, building an emergency fund is an important financial move to make in early adulthood.
Building an emergency relief fund isn’t just about saving money, though. You need to think about where you’ll keep the fund and how much money you want in it. Let’s explore some tried and true savings tips as well as keys to getting your emergency fund started.
Emergency Fund Definition
An emergency fund is a designated amount of money set aside for unexpected expenses or personal finance emergencies. These types of emergencies can include unforeseen medical bills, job loss or major home or auto repairs that you can’t put off.
Emergency funds can come in various forms, but they usually take the framework of a bank account that you put money into but rarely withdraw from. Ideally, you would only take money out of the emergency fund when you have a surprise financial hardship that exceeds your monthly budget.
Cash reserves like an emergency fund can make it easier to bounce back after the financial shock of paying expensive emergency costs, and these reserves allow for less reliance on high-interest credit cards to handle large expenses. An emergency fund may also prevent you from having to withdraw from your retirement fund for extra cash.
How Much Should An Emergency Fund Be?
The right emergency fund amount depends on your current situation, which includes your income and financial goals. You can also factor in recent or past emergencies and base your savings goal on these costs.
Start with a realistic goal, like $1,000 or so. Once you’ve saved that up, start to grow it with the goal of covering what you would need for 3 to 6 months of expenses if your income completely dried up for that period of time. If you can afford it, keep saving and building up your emergency fund even past your savings goal.
If you’re living paycheck-to-paycheck and find it tough to set money aside, remember that even a small amount helps build your fund. Figure out how much you can save each month and still have enough to afford your monthly living expenses.
How To Start An Emergency Relief Fund
Again, how you get your emergency fund going will depend on your situation and whether you can afford to set cash aside. Review the following strategies and decide if one or more of them can help you get started.
Review Your Budget
Take a look at your monthly budget and see where you may be able to cut some nonessential costs. These might include daily coffee purchases and monthly expenditures such as streaming subscriptions. Even small expenses here and there can add up, and before you know it, you can have some significant savings to put into your emergency fund.
Monthly expenses like your mortgage and other recurring debt payments obviously can’t be cut out, but think about your more “negotiable” bills when turning monthly costs into savings.
Put Away Unexpected Income
If you find yourself on the receiving end of some unexpected cash, such as a large tax return or a family inheritance, resist the temptation to make a big purchase and put this money directly into the emergency fund instead. It won’t be the most enjoyable use of your newly found funds, but you’ll be happy to have them in the event of a future emergency.
Work A Side Gig
If you can manage it with your schedule, a side hustle can be a great way to store away a little extra cash. Or you might consider pursuing a few one-time freelance gigs. Assuming your monthly budget doesn’t rely on the income from your side job, that money can go directly into your emergency fund.
Set Up A Direct Deposit
If you can swing it while still covering the monthly bills, have a portion of your paycheck directly deposited into your emergency fund. Pretty soon, you’ll be living on the remainder and forgetting all about the auto-deposit into your rainy-day fund each time you get paid.
Consider speaking with your employer about setting up your direct deposit in this way.
Sell Some Belongings
Do you have items in your home that could earn you some extra money? Selling some of them for cash can be really rewarding for your emergency savings. Old toys that no one plays with, clothes that don’t fit anymore or a boat you never use are just a few examples of items that you can turn into cash.
Where You Should Keep Your Emergency Funds
Keeping your emergency fund within your checking account is dangerous and makes it too easy to draw from for nonessential expenses. You’ll want to have quick access to your emergency money but also let it grow while it sits during nonemergency times.
A high-yield savings account checks these boxes. Funds are easy to reach with this type of account, but you’ll also earn interest on your deposits.
Pay attention to monthly fees (avoid them) and interest rates (the higher the better) when selecting an account. Also, some banks offer a cash bonus for starting this type of account, and you can use that to kickstart your emergency fund if you qualify.
When Should You Use An Emergency Fund?
As its name suggests, an emergency fund should be reserved for emergency situations. What constitutes an emergency may differ from person to person or household to household, but it generally includes unexpected expenses or bills that your monthly budget isn’t built to cover. For example:
- Emergency car repairs
- Unexpected medical bills
- Temporary income after a job loss
- Higher-than-normal utility bills
- Home damage repair
Large purchases, home improvements or debt consolidation should be left to other financing options, such as a personal loan.
Life takes some unexpected turns sometimes, and having an emergency fund as a safety net can help cushion any financial shock. No matter how you choose to build your emergency fund, make sure there’s enough cash in your account and that it’s kept in the best place. When trying to build an emergency fund, the sooner you start, the better.
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