Learning how to build an emergency fund is the first step to getting your finances in order. You’ll sleep better with some cash in the bank and, most importantly, you can start focusing on longer-term (and more exciting) financial goals.
In this guide, you’ll learn all there is to know about emergency funds, including:
- What an emergency fund is.
- How to determine the ideal size of your emergency fund.
- When it makes sense to have a small emergency fund.
- When it makes sense to have a larger emergency fund.
- Where to store your emergency fund.
- A step-by-step guide to building your emergency fund fast.
- When it’s acceptable to use an emergency fund.
- Answers to your most common questions.
Key Points:
- An emergency fund is a financial safety net designed to cover unexpected expenses or periods of no income.
- Starting with a $1,000 emergency fund can provide a basic safety net while still allowing you to focus on paying off high-interest debt.
- Your long-term goal should be to accumulate three to six months’ worth of living expenses in your emergency fund.
- Keeping your emergency fund in a highly liquid and low-risk account, such as a savings account, ensures that the money is accessible when needed.
- You can still pursue other financial goals, such as investing, while you’re building your emergency fund.
What Is an Emergency Fund?
An emergency fund is a cash reserve for unexpected costs or financial emergencies. You can use it to pay for things like fixing your car or house, paying medical bills, or surviving a job loss.
The primary benefit of having an emergency fund is that when unexpected expenses arise — and they certainly will — you can handle them without significant hardship or changes to your current lifestyle.
On a basic level, having an emergency fund allows you to afford a car repair to get to work or fix your furnace if it breaks down during the middle of winter without taking on high-interest credit card debt that you’ll be paying down for years.
Determining the Ideal Size of Your Emergency Fund
Conventional wisdom suggests that a fully-funded emergency fund should hold enough to cover three to six months of bare minimum expenses (i.e., the things that you absolutely cannot avoid).
To determine the appropriate size of your emergency fund, begin by identifying your bare minimum level of expenses.
These include:
- Housing. You need to be capable of covering your rent and mortgage payments with certainty.
- Utilities. Essential utilities such as electricity, water, and heating should be included in your calculations.
- Groceries. This includes the basic food items necessary to sustain your household.
- Other essentials. This includes any other unavoidable costs, such as medication, phone, internet, basic transportation and minimum debt payments.
Add up these essential expenses to establish your monthly bare-bones budget.
This is the minimum you need to get by each month without accruing additional debt or compromising your basic needs.
Once you’ve calculated your bare-bones budget, multiply this amount by three for the minimum size of your emergency fund, and by six for the maximum.
For example, if your essential monthly expenses total $4,000, your goal would be to build an emergency fund between $12,000 and $24,000.
| Monthly Bare Bones Budget | Three Month Emergency Fund | Six Month Emergency Fund |
| $1,000 | $3,000 | $6,000 |
| $2,500 | $7,500 | $15,000 |
| $5,000 | $15,000 | $30,000 |
| $7,500 | $22,500 | $45,000 |
| $10,000 | $30,000 | $60,000 |
When It Makes Sense to Have a Smaller Emergency Fund
Having a large emergency fund is often ideal. But sometimes it makes sense to have a smaller one.
For example, if you’re paying off high-interest credit card debt, you may want to prioritize that over saving for emergencies. Otherwise, you’re losing money by paying more interest than you earn.
A good rule of thumb is to save $1,000 as a starter emergency fund before you tackle your debt. This is called the baby steps strategy, and it can help you get out of debt faster and build a solid financial foundation.
The baby steps require you to pay off all non-mortgage debt, including student loans, before establishing a fully-funded three to six-month emergency fund. See our article on the pros and cons of the baby steps for help determining whether this is the optimal strategy for your situation
When It Makes Sense to Have a Bigger Emergency Fund
On the other hand, some people may benefit from having a bigger emergency fund than the standard three to six months of living expenses.
For example, if your income fluctuates significantly due to being self-employed, working on commission or having seasonal work, you may want a larger cushion to cover the lean months. Similarly, you should have more money for emergencies if you have a high-risk job, a large family or a chronic health condition.
Another reason to have a bigger emergency fund is if you’re fairly conservative and value peace of mind over returns.
While there is an opportunity cost to having a large emergency fund (because you’re not investing this money in something that earns a higher rate of return), you’re also protecting yourself from doing things like selling stocks at a loss because you can’t sleep at night. A bigger emergency fund can help you avoid emotional decisions and stick to your long-term financial plan.
Best Places to Store Your Emergency Fund
Once you have determined how much money you need in your emergency fund, the next question is where to keep it.
The ideal place for your emergency fund should meet the following criteria:
- Safety. Your emergency fund should be stored in a place that guarantees your principal. You don’t want to lose money due to market fluctuations or fraud. The best way to ensure safety is to look for an account with federal deposit insurance coverage from the FDIC, which protects your money up to $250,000 per depositor per institution.
- Liquidity. You don’t want to have any delays or penalties when withdrawing your emergency fund in case of an urgent need. The best way to ensure liquidity is to look for an account that allows unlimited withdrawals without fees or restrictions. You also want to avoid accounts with minimum balance requirements or maturity dates that lock up your money for a certain period.
- Interest. Your emergency fund should earn some interest while not in use. While the primary goal isn’t to maximize long-term gains, you still want to get a decent return on your money to avoid losing value to inflation. Look for an account that offers a competitive interest rate on your balance. You also want to avoid accounts that charge monthly maintenance fees or other costs that could affect your earnings.
With these goals in mind, the best place to put an emergency fund is in a high-interest savings account.
While options such as money markets and certificates of deposit (CDs) might be tempting, they often come with terms and conditions that make your funds less accessible — something you don’t want when dealing with an emergency.
Specifically, you can incur a penalty for withdrawing early from a CD, and money market funds are not insured by the FDIC.
In a high-interest savings account, your money not only remains readily available, but also grows with time due to the interest accrued. And it’s FDIC insured.
Compare the top high-interest savings accounts from both local and national banks.
I prefer a separate account at a different bank than my checking account. That’s not because I can get a higher interest rate, but because I don’t want to have frictionless access to my emergency fund. In other words, while it’s important to make sure your funds are liquid, it’s equally important to make sure they’re used only for actual emergencies. Keeping it at the same bank as my checking account would make it much easier to use the funds in non-emergency situations.
Numerous investment options, such as real estate investment trusts (REITs) and cryptocurrency interest-bearing accounts, market themselves as alternatives to traditional savings accounts. While these may yield attractive returns, they are not true savings accounts. They lack FDIC insurance and come with inherent risks, including the potential loss of principal and liquidity concerns. Although these alternatives can contribute to a diversified investment portfolio, they should not replace an emergency fund whose primary purpose is safety, accessibility, and liquidity in times of unexpected financial needs.
How to Start an Emergency Fund
Step #1: Calculate Your Emergency Fund Goal
The first step to building your emergency fund is to calculate your goal. This involves evaluating your financial circumstances and considering the amount of high-interest debt you have.
If you’re dealing with significant high-interest debt, set a modest emergency fund goal of $1,000. This initial buffer can protect you from minor unexpected expenses while you focus on aggressively paying down your debt.
If you’re not dealing with high-interest debt, your goal should be to save three to six months’ worth of bare-bones expenses in your emergency fund.
I suggest starting with a target of three months’ worth of expenses. Once you’ve achieved this, reassess your financial situation and comfort level to decide if you want to increase your emergency fund further.
Step #2: Determine Your Monthly Savings Amount for Your Emergency Fund
Once you’ve calculated your emergency fund goal, the next step is to decide how much money to allocate towards it each month. This amount will be funneled automatically into your emergency fund.
For those starting with a goal of $1,000, this should be your primary focus and should take priority over other financial goals. You’ll want to channel as much of your disposable income as possible into achieving this goal quickly, as it provides a basic safety net in a financial emergency.
After reaching the $1,000 mark, you may face a decision: should you continue to prioritize your emergency fund until it is fully funded, or should you start pursuing other financial goals simultaneously?
This is a personal decision and depends on your financial circumstances and comfort level.
For some, the peace of mind of having a fully-funded emergency fund outweighs the benefits of investing or paying down low-interest debts.
Others may choose a balanced approach, simultaneously building their emergency fund and contributing to retirement accounts — especially if they can benefit from employer-matching contributions.
Personally, I advocate for a data-driven approach. Run the numbers to see how different strategies might impact your long-term growth.
For example, you can use a retirement calculator to see how delaying investing for two years impacts your target retirement date. Or, you can use this debt payoff calculator to see how saving for an emergency fund impacts the date at which your debt will be completely paid off.
While the final decision doesn’t have to be solely based on these calculations, they can provide valuable insight to inform your choice.
It’s also helpful to realize that building an emergency fund takes time.
The table below illustrates roughly how long it will take to accumulate a three-month emergency fund based on your savings rate, assuming you’re adhering to a bare-bones budget (which I’ll define as your total income minus your savings rate).
| Savings Rate | Time to Build a Three-Month Emergency Fund |
| 10% | 30 months |
| 20% | 10 months |
| 30% | 5 months |
| 40% | 3.8 months |
| 50% | 3 months |
Step #3: Open a High-Interest Savings Account
Now that you’ve determined your savings goal and established a monthly contribution, it’s time to decide where to keep your emergency fund.
For the reasons we discussed above, the best choice here is to keep this simple by going with a high-interest savings account.
You can utilize our comparison tool to find the best high-yield savings account for your situation.
Having this separate account also introduces a psychological barrier, discouraging you from impulsive non-emergency spending. While it might take a day or two to access these funds, this minor inconvenience helps preserve the integrity of your emergency fund.
If needed, you can put emergencies on a credit card, then pay the balance off by transferring money from your emergency fund savings account to your checking account.
In addition, this designated account simplifies tracking your progress toward your savings goal. You’ll know without a doubt where you’re at in terms of the goal you set above.
Step #4: Automate Your Monthly Contribution
Setting up automatic transfers to your high-interest savings account ensures your emergency fund is consistently replenished without any manual intervention required from you.
This concept, known as “paying yourself first,” essentially treats your savings goal as a non-negotiable monthly expense. Instead of waiting to see what’s left over at the end of the month, your contribution to your emergency fund is prioritized and taken care of right from the start.
In this way, you’re less likely to fall into the trap of spending first and saving later, a common pitfall that can delay or derail your savings goals. By treating your savings contribution like any other monthly bill, you build discipline and structure into your savings habit, and steadily move closer to your financial security goal.
Most banks and credit unions offer automated transfer services, and it’s often as simple as setting up a recurring transfer online. With this approach, your emergency fund grows consistently and effortlessly, allowing you to focus on your other financial obligations and goals.
When It’s Acceptable to Use an Emergency Fund
An emergency fund is designed to provide financial stability during unexpected events that can drastically affect your financial situation. This isn’t an “I overspent this month” fund; it’s a safety net for significant unforeseen expenses.
So, while we talked about unexpected medical bills, job losses and car repairs as potential uses for your emergency fund, it’s also helpful to understand what an emergency fund is not for.
- Monthly bills. If you’re regularly dipping into your emergency fund to cover monthly expenses, it may be time to revisit your budget or try a different budgeting method.
- Routine car and home maintenance. Regular maintenance like oil changes, gutter cleaning and HVAC tune-ups should be planned for in your budget.
- Non-essential travel. If you decide to take a last-minute vacation, this isn’t an emergency and shouldn’t be paid for out of your emergency fund.
However, there can be gray areas.
Here’s one example: let’s say your car needs a significant repair that you didn’t anticipate, like a timing belt replacement at 100,000 miles. While this technically should have been accounted for in your budget, few of us actually follow our vehicle’s recommended maintenance schedule.
In an instance such as this, having a “Stuff I Forgot to Budget For” category in your budget can be helpful. Expected expenses like this will arise, so it’s best to create a buffer in your budget to handle these surprises.
At the same time, transportation is a need (not a want), so one could reasonably argue that this timing belt repair is a suitable use of an emergency fund.
Emergency Fund FAQs
There’s no question that you’ll benefit from a small safety net (let’s say $1,000) to protect against unexpected expenses. Once that fund is in place, is it better to build up your emergency fund or invest?
First things first: this doesn’t have to be an either/or question.
Specifically, there’s no rule that says you can’t do both simultaneously. For example, you can invest in your 401(k) up to the employer match and use whatever is left over to build an emergency fund.
Yes, this means it will take longer to achieve a fully-funded emergency fund. But you’ll also be taking advantage of the “free money” your 401(k) match has to offer.
Whether investing more aggressively or building your emergency fund makes sense depends on which approach benefits you the most. To make that evaluation, go back to your purpose for having an emergency fund in the first place. Plus, run the numbers of the opportunity cost for your choices.
For example, suppose the purpose is to take advantage of opportunities in your career, such as launching a new business venture. In that case, you might prioritize building an emergency fund. If you aim to retire early, you may want to prioritize investing.
Using a Roth IRA as an emergency fund can be a viable strategy, but it depends on your individual financial situation and goals.
Here are two scenarios where it may be advantageous:
Starting out. If you’re just beginning to save and invest, you might consider splitting your savings between a traditional savings account and a Roth IRA. For example, you could save $500 a month in a savings account and another $500 a month in a Roth IRA, initially keeping those Roth IRA contributions in cash or very low-risk investments. Once your savings account is fully stocked as an emergency fund, you could then adjust the Roth IRA’s investments for longer-term growth.
Already established. If you’re further along in your financial journey and have accumulated a substantial amount in your Roth IRA, you might consider using the Roth IRA as a backup to a smaller, cash-based emergency fund. For instance, you might keep about two months’ worth of living expenses in a cash emergency fund, knowing that you have your Roth IRA contributions as a last resort if needed.
Overall, the primary purpose of a Roth IRA is to serve as a retirement savings vehicle. Using it as an emergency fund should not be the default option, but can be worth considering for those who are just starting to build their financial safety net, or for those with substantial Roth IRA contributions and a solid understanding of their financial needs and goals.
The key to starting an emergency fund when living on a tight budget is recognizing the value of small wins. It might seem insignificant, but if you have only one dollar to stash away, do it. Saving whatever you can — even if it’s literally just a buck — is the first step to building the habit of saving.
Taking the intentional action of designating a portion of your income for a specific purpose — whether that’s an emergency fund or an investment account — helps you change how you think about your relationship to money (and how you use it). So it’s OK if you have almost nothing to save right now. Start where you are and build up slowly.
The Bottom Line on Emergency Savings
If you don’t have an emergency fund, there’s no better time to start than today.
Even making your first $10 deposit will allow you to go to bed tonight with more financial stability than when you started the day. As that amount grows, you’ll enjoy the peace of mind that comes with knowing that unexpected events aren’t going to push you into financial catastrophe.
From there, keep building. Every step you take will make the next step easier. And I promise that before too long, saving money will become something you take pride in rather than dread.
And once you do reach your savings goal, that’s when things get exciting. Not only will you sleep better, but you’ll be on your way to accomplishing bigger and better things with your money, knowing you have a solid foundation.
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