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Your fundamental guide to emergency fund savings

Feb. 20, 2021 • 4 min read

What we'll cover

  • The definition of an emergency fund

  • Why you need an emergency fund and how much you should save

  • How to start and build an emergency fund

While you can’t plan for every possible “what if,” you can put your best financial foot forward and be prepared, should an unexpected occasion arise. That’s where an emergency fund comes in: to protect you when unanticipated costs come a-knocking.

So you’re ready, we’ve assembled a quick overview of all things emergency fund — what it is, why you need it, how much you should keep in one, how and where to get started — and in case things go south, when to use it.

What is an emergency fund?

An emergency savings fund is cash you put aside for a rainy day, like an unplanned expense or financial emergency. Some common uses for your emergency savings include:

  • car or home repairs

  • medical bills

  • job loss or other unexpected decrease in income

Why do you need it?

An emergency fund can help bail you out of a tough situation. It’s an account that you can tap when you have an unforeseen expense that you can’t afford to pay for out of your regular checking account.

And it can help keep you out of further debt, because you won’t have to rely on using your credit card (and possibly being unable to pay off the balance immediately) or taking out a high-interest loan.

When you’re hit with a sudden expense, it can feel like an emergency — but that may not always be the case. Ask yourself these three questions to help you determine whether you should use your emergency savings:

  • Is it unforeseen?

  • Is it essential?

  • Is it urgent?

If you can answer at least two of these questions with a yes, then it’s likely that the situation calls for you to tap into your emergency fund.

How much should you have in an emergency fund?

Knowing how much you should stash in an emergency fund might not be clear. But there are simple guidelines to follow, so you’ll be covered should you need a little extra help for when things are financially uneasy.

The short answer: Three to six months’ worth of essential expenses.

The long answer: This amount is a good rule of thumb, but it’s not a one-size-fits-all answer. The specific amount you should save will vary based on your financial circumstances and your comfort level.

Think about how much you spend each month on things like rent, utilities, food, and transit. These are considered essential expenses. Total the cost of these necessities and multiply that sum by the number of months you want to save for (six, for instance) to determine your savings goal.

When calculating how much you should have in your emergency fund, don’t include costs such as entertainment and dining — these are discretionary expenses. In your emergency fund calculation, you should only include those expenditures that you truly need to live.

Our calculator can help you identify how much you can afford to save each month and put towards your emergency savings.

How do you start and build an emergency fund?

We know that starting anything is the hardest part. These strategies and methods laser in on small savings wins so you can start building a fund, even if there seems to be no extra wiggle room in your budget.

Some quick tips to help you establish your emergency savings:

  • Set a monthly savings goal. Most people can’t hit their savings target immediately. So get in the habit of saving regularly and work towards fully funding your emergency account. Just give it time and consistency, and it’ll happen.

  • Start small, if you need to. Building an emergency fund doesn’t have to be a big financial commitment. Microsaving with spare change can help build your savings.

  • Set up recurring transfers. When funds automatically transfer from checking to your Online Savings Account , you aren’t tempted to spend what you’ve set aside for a rainy day. And our buckets tool can help keep your emergency savings separate from your other savings, without different bank accounts or fancy math.

  • Consistently reassess and make adjustments. Three to six months’ worth of expenses can fluctuate based on significant life events such as marriage or buying a house, for example. So, you’ll want to adjust your emergency savings accordingly.

Where should you put an emergency fund?

Building a substantial emergency savings is a priority, but it’s also important to keep your funds in the proper place. You’ll want to keep your emergency fund in a liquid account that’s easily accessible, like our Online Savings Account , where you can earn interest at a competitive rate and make withdrawals at any time.

Once your emergency fund is fully funded, you can consider housing additional savings in CDs (Certificates of Deposit) or investing in stocks, bonds, ETFs, or mutual funds, where they have the potential to grow your wealth even more.

Can you have too much in your emergency savings?

Once you’ve hit that six-month benchmark of savings, you might consider other account options for your savings.

While it’s impossible to predict what it will be or when it will happen, a financial emergency is pretty much a fact of life. So, it’s important be prepared for when that rainy day when it arrives.

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