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Money habits & rights

Building an emergency fund

6 min read · General education, not legal or financial advice

An open paper planner with a monthly calendar grid lying on a desk

A car that won't start, a medical bill, a few weeks without a paycheck: most households face an unplanned expense sooner or later. An emergency fund is money set aside in advance for moments like these. This article explains what an emergency fund is, how people commonly think about the size of one, the general approaches people use to build one over time and the places people tend to keep it. It describes options; it doesn't recommend a particular amount, account or method for anyone's situation.

What an emergency fund is

The Consumer Financial Protection Bureau (CFPB) describes an emergency fund as a cash reserve that's specifically set aside for unplanned expenses or financial emergencies. Its examples include car repairs, medical bills and a loss of income.

The key word is "set aside." Money in an everyday checking account can serve the same purpose, but many people find it easier to leave savings alone when it is kept separate and labeled for one job.

Why people build one

The CFPB explains the reasoning this way: without savings, even a minor financial shock can push a household toward credit cards, loans or early withdrawals from retirement accounts, and the resulting debt can be hard to pay off. Interest and fees can make an emergency more expensive than the original bill.

An emergency fund changes the order of events. When an unexpected cost arrives, the first stop is money that is already there, rather than new borrowing. That is the whole idea; it does not need to be a large amount to serve that purpose. The CFPB notes that even a small amount of savings can provide some financial security, and FINRA's investor education materials say that even if a person can't reach a target amount, the most important thing is to start the habit of saving.

How people think about the size

There is no single correct figure, and sources describe the question in different ways.

  • Based on past emergencies. The CFPB's guide doesn't give a fixed dollar amount. It suggests looking back at the unexpected expenses a household has faced before, such as repairs or medical costs, and using those as a guide to a savings goal.
  • Based on months of expenses. FINRA notes that financial planners often recommend the equivalent of three to six months of living expenses, and that people with irregular income or specialized careers may want a larger reserve.
  • Starter goals. Some people set a small first target, finish it, and then set the next one. The CFPB encourages setting a specific goal and celebrating milestones along the way.

For a sense of scale, the arithmetic is simple. If a household's essential monthly costs were $2,500, three months would be $7,500 and six months would be $15,000. Those figures are invented for illustration. The emergency fund illustration on the Tools page shows the same calculation for any figure you enter, and it runs entirely in your browser.

General approaches to building one

The CFPB's guide describes several habits people use. None of them is required, and many people combine more than one.

Set a goal and track it

The CFPB suggests creating a specific savings goal, contributing consistently, tracking progress and marking milestones. A goal with a number attached is easier to measure than a general intention to save more.

Use cash flow to find room

The guide suggests tracking when money comes in and when it goes out over a month. Some households find that bills cluster in one week and income arrives in another. The CFPB notes that people can ask creditors about changing a bill's due date, and can save more in weeks when there is extra cash after bills.

Automate a transfer

Recurring transfers move a set amount from checking to savings on a schedule, often right after payday. The CFPB describes this as a way to make saving automatic, and it suggests keeping an eye on the checking balance so that a transfer doesn't cause an overdraft fee.

Split a direct deposit

If an employer allows it, a paycheck can be divided so part goes straight into savings. The CFPB mentions this as a way to save without having to move the money manually each time.

Save one-time money

Tax refunds, cash gifts and other one-time amounts are another source the CFPB mentions. Putting all or part of a windfall into the fund can make a noticeable difference in a single step.

Start small

A small, regular amount adds up. Setting aside $25 a week, for example, comes to $1,300 over a year, before any interest. Again, the figure is only an illustration.

Where people keep an emergency fund

The CFPB describes three qualities people usually look for: the money is safe, it is accessible when needed and it is not so easy to reach that it gets spent on everyday things. The guide describes several options.

  • A bank or credit union account. The CFPB calls this generally one of the safest places to keep money, and suggests a separate account just for emergencies. FINRA describes a liquid, interest-bearing account, such as a savings account at a bank or credit union, where money can be withdrawn without penalty.
  • A prepaid card. The CFPB notes that a prepaid card limits spending to what's loaded on it and isn't connected to a bank or credit union account.
  • Cash. Some people keep cash at home or with someone they trust. The CFPB points out that cash can be lost, stolen or destroyed.

Deposit insurance is one reason bank and credit union accounts are described as safe. The Federal Deposit Insurance Corporation (FDIC) says deposits are insured to at least $250,000 at each FDIC-insured bank, and that the insurance covers deposit accounts, not products such as stocks, bonds, mutual funds, annuities or crypto assets. The National Credit Union Administration (NCUA) says share insurance at federally insured credit unions covers $250,000 for individual accounts and is backed by the full faith and credit of the United States.

FINRA also mentions money market funds and certificates of deposit as places some people consider, and notes the importance of checking how quickly money can be reached and whether there are penalties for early withdrawal.

Using the fund, and refilling it

The CFPB suggests deciding in advance what counts as an emergency, since not every unexpected cost is a crisis. A personal rule written down ahead of time can make the decision easier in the moment. The guide is also clear that the point of the fund is to use it when needed, and that using it can mean avoiding the interest and fees of borrowing.

FINRA cautions against dipping into an emergency fund for discretionary spending, such as holiday shopping or luxury purchases. After a withdrawal, both sources describe the next step as rebuilding the fund over time, often with the same habits that built it in the first place.

How it connects to other topics

An emergency fund often comes up alongside budgeting, since a budget is where people decide how much they can set aside each month. The article Budgeting methods compared describes four common ways people organize a budget, including one that puts savings first. The Saving and Emergency Funds course covers these ideas in short lessons.

Sources