How to build an emergency fund

Having cash available to cover financial emergencies isn’t just good for your finances—it’s also good for your stress levels. More than two-thirds of workers like you are concerned about their finances adding stress to their lives.¹

• 33% of workers are concerned they don’t have enough money to cover sudden and unexpected expenses
• 19% have recently dipped into savings to pay for daily life

1. Estimate your expenses and set your goal

How much do you need in your emergency fund? Most experts agree that you should put aside three to six months of expenses.

You can start estimating by adding up your set monthly expenses, such as:

• Rent or mortgage payment
• Utilities payments (gas, electric, and water)
• Telecom payments (phone, cable, and internet)
• Insurance payments (car, health, and home)
• Transportation costs (car payment, gas, and public transit)
• Debt payments (credit cards and other loans, except mortgage)
• Grocery expenses
• Medical expenses
• Dependent expenses
• Other fixed expenses

Multiply your total by three to six to estimate the amount you should try to save for emergencies. You can look at how the total compares with potential unexpected expenses such as a broken appliance or car repair. Consider how much you should be setting aside if you’re out of work or have a large, unexpected expense, then set your goal.

2. Create your saving plan

After determining your goal, you can now decide how much to save each month and how long it will take to meet your target.

• Create a monthly budget of your income and expenses
• Think about your spending habits and identify areas where you can trim expenses and save more
• Aim to contribute a manageable amount each month
• Decide how much you can afford to save monthly
• Treat savings as a bill you have to pay (which is true, as you’re paying your future self) and don’t miss a payment
• Get as much satisfaction out of saving as you would from spending

The easiest way to save is to make it automatic, which you may be able to do through your paycheck or bank account.

• Automatically deduct savings from your paycheck or checking account monthly
• Earmark non-salary-related income such as from a bonus or tax return to build your fund

Starting slow is okay—your savings will build if you follow your budget and keep putting money in the fund.

3. Decide where to keep your emergency fund

You’ll want to keep your emergency savings in an account that’s easy to access and low risk while also offering a decent interest rate. An investment account generally isn’t considered a great place for emergency savings because there’s a risk of losing money if the investments lose value. Your emergency fund should be easy to access when you need it but also separate from your day-to-day funds so that it’s not easy to dip into for nonemergencies.

Although savings accounts by nature offer fairly low interest rates, you can shop around to find one with a high rate and good terms. Consider looking into financial institutions that offer high-yield savings accounts, and be sure the account you choose is FDIC insured so your money is insured by the federal government (up to allowable limits) and can be easily withdrawn.²

The importance of having an emergency fund

There’s only one certainty about financial emergencies—they will happen and generally do at the worst times. This is why it's important to have an emergency fund. Taking the time now to set your saving goal, create a saving plan, and find a safe place for your money can help save you time, stress, and money when the unexpected happens.