Emergencies are an inevitable part of life. Whether it’s your car, your health, or your home, emergencies can be scary and costly.
There’s good news, though: An emergency fund can help you offset the cost and stress of the unexpected tremendously. All you need to do is a little bit of prep work.
Regardless of your age or occupation, a major part of financial responsibility is setting up an emergency fund. Doing so will help you avoid racking up high-interest debt that could cost you tens of thousands in the long run.
Creating a major savings account can seem intimidating, but we want to help. Here’s a look at what it takes to set up an emergency fund, how much you should put in it, and when you should — and shouldn’t — dip into it.
Why you need an emergency fund
You likely have a credit card in your wallet, but there’s one good reason why you shouldn’t rely on that card for emergencies: Interest.
Let’s say your car breaks down and you need to replace the engine. Putting $4,000 down on a credit card with an average interest rate of 21.21% will result in $432 of interest charges over 12 months. And that doesn’t include late payment fees.
Or what if you learn your home’s foundation has a crack in it and needs to be repaired? That could cost up to $15,000. And if you put that on the same credit card and pay it off over two years, your total bill comes out to around $18,215.
Having an emergency fund set aside for moments like this takes the emotional and financial stress out of handling life’s little curveballs.
How to set up an emergency fund
Now that you know why you need an emergency fund, let’s talk about how to set one up.
Start by revisiting — or creating — your monthly budget. Factor in a small amount of money to be set aside each month that goes into an emergency savings fund.
Cash is fine, but a savings account is your safest bet. Just make sure this account is easily accessible, or that money can be immediately transferred into your checking account so you can pay upfront for unanticipated bills. Ask your preferred financial institution if they offer any high-yield savings accounts that would allow your money to grow over time.
Every few months or so, try to increase your savings deposits — even if it’s just by $20, it will make a huge difference in your overall savings.
How much money should you have in an emergency fund
There’s no one right amount you should have in your emergency fund — it’s based more on your lifestyle, location, and family size.
Ideally, you should have between three and six months’ worth of living expenses tucked away. On the off chance, you lose your job or can’t work, this will allow you to pay for food, shelter and other necessities until you have a steady income again.
This is not an easy feat to accomplish, but consistency is key. Along with the monthly contributions we discussed, try to put any extra or unexpected income into your fund.
When should you use an emergency fund?
The most important thing to remember about your emergency fund is that it isn’t for snacks after a late night out or concert tickets to see your favorite band. It’sThis is for emergencies only.
You should use it for unexpected costs associated with your basic life necessities.
Here are a few instances you should use your emergency fund for:
- You or a family member incur unexpected medical expenses. You should budget for the basic medical expenses, like recurring prescriptions and annual dental checkups, but emergency surgeries or ER visits can — and should come out of your emergency fund.
- Your car breaks down.
If you get a flat tire or your engine dies, your emergency fund can cover that. If your vehicle is totaled or repairs would cost more than it’s worth, consider putting all or part of your emergency fund toward a new one. - Your home floods. This is another instance where building an emergency fund could help you react quickly and wisely to the unexpected.
All of this is to say that your emergency fund should be used to keep you out of crushing debt. If you need to use it to pay a bill here and there, that’s fine. But Try to pay yourself back, though, so you always have a cash cushion to fall back on.
If you have any questions or need help setting up an emergency fund, contact your preferred financial institution today.
FAQs
An emergency fund should cover three to six months' worth of expenses, but saving that amount takes time. To help get you started, begin with small goals, such as saving $5 a day. Then work your way up to a reserve to cover several months' worth of expenses.
Is there a set amount for how much a person should have in their emergency fund? ›
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
Why should you save $500 dollars for an emergency fund? ›
This amount can over a lot of common emergencies or unexpected expenses: a speeding ticket, an urgent care clinic visit, many car repairs, unexpected school-or extracurricular-related expenses, an appliance repair, and so on. Once you save $500, try saving $1,000.
What are two real life examples of how an emergency fund could help reduce stress in your life? ›
What should you use your emergency fund for?
- Job loss. One of the biggest financial emergencies is job loss. ...
- Income reduction. Even if you don't lose your job, you might see your hours or salary cut. ...
- Medical bills. Paying medical bills is a huge source of stress and financial distress. ...
- Emergency repairs.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Is $10,000 enough for emergency fund? ›
It's all about your personal expenses
Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.
How much emergency cash should I keep at home? ›
“A cash amount enough to cover the absolute bare necessities for two months might be a reasonable basis,” Pepper says. “This monthly amount would be less than the monthly amounts used to calculate a traditional emergency fund, as it's really there to cover the bare necessities in the face of an emergency.”
How much to save per month? ›
How much should you save each month? For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.
How much emergency fund should I have Suze Orman? ›
“Every family should have an emergency savings account that can cover at least eight months of living expenses,” Orman wrote in a post on Oprah.com.
Where is the best place to put cash right now? ›
CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk.
How much emergency fund should I have? Sudden car repairs, medical emergencies or job loss can all lead to unexpected debt if you're not prepared. It's difficult to predict how much these or other emergencies could cost — but three to six months' worth of expenses is a good goal.
What are the top three careers reported among millionaires? ›
Dave Ramsey on X: "Top 5 Careers of Millionaires: 1. Engineer 2. Accountant (CPA) 3. Teacher 4.
What not to use an emergency fund for? ›
The first thing you'll want to avoid using your emergency fund for is non-essential purchases. Non-essential purchases are things you want but can live without. For instance, buying new electronics when your current ones are still working fine or taking a luxury vacation.
How to quickly save an emergency fund? ›
Automate your savings
Set up a separate account just for your emergency fund and have your chosen contribution amount deposited automatically, either by your employer or your bank. Use a savings or other type of account that you can't access easily, unlike a checking account. Chances are you won't miss it.
When should I dip into my savings? ›
For example, a bathroom remodel is a want but a major leak is a need. Medical expenses can be another gray area. Necessary, unexpected medical expenses, like a trip to the ER, is a good candidate for using your emergency fund. Elective healthcare such as plastic surgery, which may not be an emergency, probably isn't.
Is $20000 enough for an emergency fund? ›
APY = Annual Percentage Yield. APYs are subject to change at any time without notice. While $20,000 may be more than what many Americans have in savings, it's not guaranteed to be an adequate emergency fund for you. Your emergency fund should be set up to cover at least three full months of essential bills.
Is a $5,000 emergency fund enough? ›
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.
Is $12,000 enough for an emergency fund? ›
While there's no one-size-fits-all goal for everyone, many personal finance experts recommend saving three to six months' worth of essential expenses. In our example, that goal would fall between $6,000 and $12,000.
How much should you eventually have in your emergency fund? ›
People in stable jobs are recommended to put away 3-6 months' salary into their emergency fund, whereas people with lower job security are recommended to save 6-12 months' salary. A stable income ensures a consistent and bigger emergency fund. The number of earning members in the family also matters.
