Emergency fund: Why you need one and how to get started 

When you come home from work, the last thing you want to find is a puddle on the kitchen floor next to a smoking refrigerator. Even after you throw away the spoiled food and make alternate dinner plans, you’re still left with the stress of a broken fridge. 

Appliances aren’t cheap. But you don’t have to cry over your spoiled milk (literally and figuratively) if you have an emergency fund to cover situations like these. Read on to learn how invaluable a financial safety net an emergency fund can be—and how to build one.  

Table of contents 

• What is an emergency fund? 
• Why you need an emergency fund 
• How much should you have in an emergency fund? 
• Where to keep your emergency fund 
• How to build an emergency fund 
• When to use your emergency fund 
• Save for a rainy day 

What is an emergency fund? 

An emergency fund, by definition, is a stash of saved cash you can easily access to cover a financial surprise. Some call it a rainy-day fund, safety net, or nest egg. The point is that it’s money you can use when you need it most, like when your fridge gives out. That way, instead of stressing out about how you’ll come up with the money to replace or repair it (or which other bill to skip), you’ll already have the funds on hand to fix it. 

Why you need an emergency fund 

With all the expenses and bills we deal with daily, it can be easy to overlook the importance of an emergency fund. You might think setting aside money in a savings account is enough. 

However, an emergency fund is typically intended to offset unexpected expenses. It’s not meant for short- or long-term savings goals, such as saving for a new car, a home, or retirement.   

Having money saved up to cover emergencies is comforting, but how do you know you’re dealing with a true emergency? Just ask yourself three questions:  

• Is the situation unexpected?  
• Is it urgent?  
• Is it necessary?  

The following situations might fit the bill:  

• Car repairs  
• Home repairs  
• Job loss  
• Unexpected medical expenses  
• Unplanned travel expenses  

Let’s zoom in on car repairs. Your family’s vehicle is an essential part of everyday life. Without it, no one can get to school or work, which can cause serious disruptions. But not all car repairs qualify as an emergency. 

For example, changing the oil in your car is necessary but not urgent or unexpected. That’s an expense to include in your regular budget. However, repairing a cracked radiator is necessary and urgent. This is precisely the type of unexpected expense your emergency fund is for.  

How much should you have in an emergency fund? 

Calculating an emergency fund amount can be challenging if you don’t already have a target in mind. To get past this hurdle, start by setting a savings goal.  

Many financial experts recommend stashing away three to six months’ worth of expenses in your emergency fund, but the exact amount you need depends on your financial situation. Some go as far as to say you should save enough to cover 12 months of expenses for maximum security.  

With these recommendations in mind, calculate a target amount for your emergency fund. Let’s say you have $3,000 in monthly expenses, for example. If you’re shooting for three months’ worth of expenses, you’d aim to save $9,000 in your emergency fund (3 x $3,000). For 12 months’ worth of savings, that amount would double to $18,000. 

That’s a lot, so it might make sense to start small and work toward your target amount over time. For example, you could aim for $1,000 to get your emergency fund off the ground. 

If you’re still paying off credit cards or student loan debt, saving that much money may seem challenging. But that doesn’t mean you should abandon the emergency fund idea altogether. It just may take some time. As you pay down your debts, you can contribute more to your emergency fund until it’s where you want it to be. 

Where to keep your emergency fund 

So, where should you store your emergency fund? Some popular financial products people use to set theirs up include: 

• A money market account. These typically combine the features of checking and savings accounts, such as the ability to write checks or swipe a debit card when necessary. They also sometimes offer higher interest rates than regular savings accounts. 
• A high-yield savings account. These will earn you more interest on your money than traditional savings accounts.  
• A standard savings account. You can open a standard savings account and link it directly to your checking account if it’s through the same institution. You may not experience the same gains as with a high-yield account, but you can still transfer and access your money quickly when emergencies strike.  

To avoid dipping into your emergency savings, you might choose a different bank for your fund. The idea is to create a bit of distance and make it less tempting to spend on something unnecessary, like an over-the-top Christmas gift or new sneakers.  

It also helps to find a savings account that pays high interest, such as the high-yield and money market accounts we mentioned above. You won’t fund your retirement with the interest you make, but you may as well earn what you can on the money while it’s not in use.  

How to build an emergency fund 

Set a goal 

Use your emergency fund calculation from above to steer you toward a precise savings goal. Be realistic and give yourself a little grace when deciding on your goal. After all, you can’t hit the pause button on life. Other bills and expenses will continue, so it’s important to set a savings goal that gives you space to cover those.  

For example, you may decide you can set aside $100 every paycheck while keeping up with all your other bills and obligations. Sure, this may not seem like a lot, but you’d be surprised how quickly it adds up as you simply live your life and stick to the plan.  

But how do you come up with that plan? It starts with creating a budget.  

Create a budget 

After you set up your emergency fund account, it’s time to start making deposits. Setting a monthly budget can help by showing how much money you have coming in and where it’s going each month.  

If planning a budget seems overwhelming, there are several popular frameworks—like zero-based budgeting—that you can use to help you start keeping track of your income and expenses. Then, look for ways to cut back on your spending so you can contribute more to your emergency fund.  

If you can’t cut back on your current expenses, consider ways to create more income. Consider taking a second job or starting a side hustle to earn extra money to set aside in your emergency fund.  

Another option is to sell items you own but no longer need. A few dollars here and there will add up, and you’ll start to see your account balance increase.  

Automate your savings and consistently contribute 

Once you designate your emergency fund, get in the habit of consistently contributing to the account. Between regular contributions and account interest, your emergency fund can grow nicely until you need it.   

Most banks allow you to easily set up automatic contributions. Some banks even allow you to round up purchases to the next dollar and deposit that money into a separate savings account or bucket. Regardless of the method you choose, the important thing is to contribute money to grow your emergency fund consistently.   

Monitor your progress and make necessary adjustments 

A successful emergency fund doesn’t end after you set up your account and savings process. You’ll want to track your progress as you go and determine if you need to adjust your savings plan along the way.  

Use the notifications in your online banking app to keep track of your emergency fund. Watching your balance grow can be a great motivator to keep saving and making responsible money choices. After saving for a while, revisit your budget and make any necessary adjustments.  

When to use your emergency fund 

Once you hit your emergency fund goal, having all that money available can be a gift and a curse. It’s important to use the money only in real emergencies. 

A new purse, new car, or spontaneous vacation are not emergencies. Although these things may feel like needs in the moment, they are wants. You can still have them, but save for them responsibly in accounts separate from your emergency fund.  

Your emergency fund is for unexpected expenses. Situations like a broken radiator or blown transmission in your car, repairs for a leaky roof, or a busted new water heater are emergencies. These are scenarios when you’d tap into your fund, solve the problem at hand, and maintain your sanity. 

Save for a rainy day 

An emergency fund is more than just money. It’s a lifeline for life’s surprises that gives you peace of mind and helps avoid unnecessary stress. You’ll have one fewer thing to worry about as you swiftly handle the inconvenience and move on with your life.  

Saving up an emergency fund is just one piece of the financial puzzle, though. It’s a small part of the larger plan that keeps you and your family’s finances in safe, working order. Visit our financial literacy resource library to discover more ways to plan, prepare, and set yourself up for a prosperous future. 

Ready to take the next step?  Intuit for Education offers a free Preparing for Emergencies online course to help you build your financial resilience.