How to Build an Emergency Fund (2024)

Everyone needs an emergency fund—and today it’s more important than ever.

No matter what your income, there will probably come a time when you’ll need money fast to deal with an unexpected mishap, such as a hospital bill, boiler that suddenly stops working or a surprise job layoff. Without such savings, you would likely have to borrow from your credit card or take out a loan, which both charge interest, unless you could borrow from family or a friend.

Of course, while financial planners have always recommended putting a little money aside for a rainy day, for many of us the disruptions of the last few years—like a pandemic and decades-high inflation—have made it impossible to ignore. But having money you can tap when necessary alleviates stress, and can help you avoid making rash choices that could hurt you in the long term.

“Emergency funds are really lifelines to help you make better financial decisions,” says Michelle Crumm, a financial advisor in Ann Arbor, Mich.

Putting away a little money every month takes discipline. But the rest of setting up an emergency fund, from estimating your needs to opening an account, is relatively simple. Here is how to do it in five basic steps.

1. Decide how much to save

The rule of thumb used by financial advisors is to cover three to six months of living expenses in case you lose your job. That’s a great place to start. However, if you have a seasonal job, work on commission or are employed by the same company as your partner, a longer time frame such as nine months might be more fitting. Six months may be unnecessary too, depending on your situation. A recent college graduate living at home and not paying rent will likely need a smaller emergency fund than someone with children paying off a mortgage.

Another approach is to break the problem down into component parts, according to Chris Chen, a financial advisor based in Newton, Mass. Chen recommends multiple emergency funds, with different time frames and purposes: a short-term fund for any last-minute necessary purchase like a new car battery that you’d otherwise charge on a credit card; a midterm fund for repairs, like a new water heater; and a long-term emergency fund for when you lose your job. Funding requirements would increase as the time frame lengthens.

Of course, for many of us, the prospect of saving three-to-six months or more of salary might seem unrealistic. If that’s the case, don’t despair. You can still do yourself a huge favor by saving whatever you can afford to. “Something is better than nothing,” says Frank Paré, a financial advisor in Oakland, Calif., and former president and chair of the Financial Planning Association.

2. Decide how to reach your savings target

The surest way to build up an emergency fund is to regularly put aside a portion of your earnings into an emergency savings account, preferably as an automatic debit from a checking account.

Figure out how much you can afford to set aside after paying for necessities, discretionary purchases and other savings. Necessities would include payments you have to make regularly, like rent, groceries and utility bills, while discretionary purchases are those you make for fun, like going out to eat and to the movie theater. You may have other savings goals you have to squirrel money away for alongside your emergency fund, like buying a car or doing non-urgent home repairs. If that’s the case, determine how much you can reasonably save for your emergency fund if you’re also setting aside money for those goals.

Then create a plan to deposit money on a regular basis so the account can grow and benefit from compounding. “The key is to develop a habit of setting aside however small or large an amount that you can afford,” says Paré.

The easiest way to set aside money is through automatic deposits via direct deposit, which transfers funds directly from a checking account to a savings or money-market account. Complete your institution’s direct deposit form providing the routing number and account number of your checking account and the amount you want to transfer each pay period or another period.

“If the money is taken out automatically, you don’t see it, and you don’t spend it,” says Paré. You save it. Consider also depositing any annual bonus or all or part of an annual salary increase into your emergency fund to grow it faster.

3. Decide where to keep your emergency fund

There are several savings vehicles you can use for your emergency fund, both online and otherwise. Consider which type best fits your needs. Once you’ve made your choice, shop online to find the highest-paying account or security within that category.

High-yield savings accounts

These accounts pay substantially higher yields than ordinary savings accounts, often more than 10 times the national average savings rate. The best high-yield savings accounts pay close to 5% or even more in 2024, meaning your money can work for you even as it’s set aside for emergencies. They are offered by banks, where they’re insured by the Federal Deposit Insurance Corp., or FDIC, and by credit unions, which are insured by the National Credit Union Administration, or NCUA.

Most of these accounts have no minimal fees or minimums. High-yield savings accounts, and savings accounts in general, are typically used to stash cash while checking accounts are where you’d keep your money for everyday expenses. Because of the transactions associated with checking accounts, you may face more fees than you would with a savings account, like overdraft fees.

Money-market accounts

Like high-yield savings accounts, money-market accounts are insured by the FDIC or NCUA but, unlike savings accounts, these interest-bearing deposit accounts offer check-writing and usually limit the number of free withdrawals per month. High-yield money-market accounts have rates that are competitive with high-yield savings accounts. Don’t confuse them with money-market funds.

Money-market funds

Entirely separate from money-market accounts, money-market funds are low-risk mutual funds that invest in short-term U.S. Treasurys, corporate debt or municipal debt. Unlike money-market accounts, they are not insured against loss but with only one notable exception they have historically maintained their standard $1 net asset value. Their yields tend to be lower than high-yield savings or money-market accounts.

CDs

CDs are federally insured savings products that pay interest on a lump sum deposit for a fixed period of time, which can run from one month to five years or more. There are two primary types of CDs: bank CDs and brokered CDs, also known as tradable CDs. You’re locking up your money for a defined period of time with bank CDs and penalized for early withdrawals; brokered CDs typically pay higher rates than bank CDs and allow early withdrawals without penalty. CDs can earn rates that are competitive with high-yield savings and money-market funds.

Short-term Treasurys

Treasury securities are among the most liquid financial securities in the world, meaning they can be easily redeemed if you need the money before their maturity. For emergency fund purposes use Treasury bills, whose maturities range from four to 52 weeks, or two to three-year Treasury notes and check if their yields are higher than high-yielding savings accounts, money-market accounts, money-market funds and CDs of comparable maturities.

Treasurys can be purchased through a broker or via a TreasuryDirect account, which you easily set up online. Purchases through TreasuryDirect purchases must be held 45 days before they are sold, and selling before maturity requires a transfer to a brokerage account. Don’t be tempted to use a Treasury I Bond for an emergency fund because you cannot cash it in for at least 12 months after purchase and you lose three months worth of interest if redeemed before five years.

4. Open your account

Once you’ve decided on the type of account for your emergency fund, you’ll have to complete an application from the host institution. Most likely you’ll be doing this online. You’ll need to provide:

• your name, address, phone number, email address
• Social Security number
• government-issued picture ID such as a driver’s license or passport, which you can download, then upload online
• possibly proof of address and answers to questions about your background to verify your identity

Once the account is opened, start funding it with deposits, satisfying any required minimum. While high-yield savings and money-market accounts have negligible minimums, if at all, CD accounts usually require a lump-sum investment of a few hundred or $1,000 dollars. You won’t be adding funds to a CD account, however, so choose a lump fund that you can afford and that gives you peace of mind.

5. Know when to use the fund and when to leave it

After building up your emergency fund, it’s time to set boundaries around when to actually use it. View this money as what might be behind an “in case of emergency, break glass” sign, Crumm says. If your water heater goes out or your car breaks down, using the money makes sense—but the same doesn’t go for spending it on a vacation with friends.

“If it’s not an emergency, you should view [the money] as not accessible,” Crumm says.

But you also want to make sure you’re not missing out on the potential for growth. If your emergency fund grows to more than what would cover six months of living expenses (or whatever time frame makes sense for you) thanks to interest in a high-yield savings account, Crumm says to consider investing that excess money elsewhere.

This may entail checking in on your emergency fund quarterly and moving any money you don’t actually need in the fund to a taxable brokerage account or retirement savings account where it can benefit from the high growth potential of the financial markets.

(Mallika Mitra contributed to this article.)

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