How to build an emergency fund

An emergency fund provides a financial cushion for life’s unexpected moments, whether it’s a job loss, a major car repair or a sudden medical bill. Having money set aside in an emergency savings account can help you handle these situations with less stress and more stability.

Here's how you can build an emergency fund for unplanned expenses.

What is an emergency fund?

An emergency fund is money set aside to help you handle unexpected expenses. Sudden financial costs can be stressful, so it's important to have an emergency fund with savings in place to make them easier to manage.

Most experts recommend saving enough in an emergency fund to cover three to six months' worth of living expenses. Although that may seem like a lot, this safety net is a smart financial decision that can help you cover surprise costs without relying on credit cards and loans or dipping into long-term savings for other goals.

How much should I save in my emergency fund?

How much you should save in your emergency savings account depends on your monthly essential expenses and the number of months you'd like to save for. For example, say your monthly costs include rent, utilities, car payment, gas and groceries, and they add up to $2,500 a month. If you want enough to cover six months of expenses, you'll need $15,000 in your emergency fund.

If the amount you need to save sounds high, start with a lesser goal, like two months of expenses. This will provide you with funds for smaller emergencies, such as an unexpected car repair, medical procedure or travel to attend to a serious family matter. If you do need to use the money in your emergency fund, start resaving as soon as possible so you’re prepared the next time the unexpected happens.

4 steps to build your emergency fund

If you're ready to begin building your emergency fund, breaking the process into a few simple steps can make saving money feel manageable and keep you consistent.

1. Determine your emergency fund goal:

To determine your monthly expenses, add together a month's worth of your necessities, such as your rent or mortgage payments, bills, groceries and car payments. Exclude expenses you can do without, such as new clothes, going out to eat and other simple luxuries. Then multiply by the number of months you'd like to save for, which is generally three to six.

2. Open a savings account:

Open a savings account specifically for your emergency fund or set up a separate savings bucket within your current account. Keeping this money separate from your everyday spending can make it easier to track progress and reduce the temptation to use it for non-emergencies.

3. Automate emergency savings:

Set up automatic transfers, such as on the days you get paid, from your checking account to your emergency savings account. That way money moves into the fund on a regular schedule. If your employer offers direct deposit, set it up so that a certain amount goes into your emergency fund each paycheck. Even small, consistent contributions can add up over time and help you build the habit of saving.

4. Monitor and replenish your emergency fund:

Define what you'll consider a financial emergency, such as job loss, urgent home repairs or medical bills. Periodically review your balance to make sure it still matches your needs. Replenish your savings account as soon as you're able after using the funds.

Choosing a savings account for your emergency fund

When choosing where to keep your emergency savings, you may find it helpful to store the money in a separate account. That way it’s easier to track and less tempting to use for everyday spending. Several types of savings accounts are available. Here are three to consider:

• Traditional savings account: A traditional savings account is a basic deposit account that allows you to safely store money while earning a small amount of interest. It's easy to set up and often has low minimum balance requirements. It can be a convenient place to build your emergency fund, especially if you open a separate account specifically for this purpose.
• Money market account: A money market account is an interest-earning deposit account that typically combines some of the features of both savings and checking accounts. It usually has a higher interest rate than a traditional savings account but may require a higher minimum balance.
• High-yield savings account: With a similar interest rate to a money market account, a high-yield savings account can help you grow your emergency fund faster than traditional savings. However, you may have a limit on your number of monthly withdrawals, and some accounts have a minimum balance requirement, although it's often less than for a money market account.

How to quickly build an emergency fund

If you want to build your emergency fund faster, small changes to your spending and saving habits can help you make quick, steady progress.

Start small

If saving several months of expenses feels overwhelming, start with a smaller, more manageable savings goal. Reaching an initial milestone can help build momentum and make the larger goal feel more achievable. Once you hit that first target, continue adding to your fund over time.

Cut back on spending

Review your monthly expenses and look for areas where you can scale back, such as dining out, streaming subscriptions, entertainment or impulse purchases. Redirect the money you would have spent toward your emergency fund.

Pause before large purchases

If you're considering a big purchase, try waiting at least 24 hours before buying. This gives you time to decide if the purchase is truly necessary and helps reduce impulse spending. If you ultimately decide not to buy, transfer the money you would have spent into your savings.

Increase your income

Consider picking up a side hustle, freelance work or a part-time job and put the money you earn into your savings. Even temporary or occasional extra income can help grow your emergency fund more quickly.

Save unexpected windfalls

If you receive extra money, such as a tax refund, work bonus or cash gifts for birthdays or holidays, consider putting at least a portion of it toward your emergency savings

Get creative when deciding how to save. You know your spending habits better than anyone and which tricks work best for your budget.

Start building your emergency fund today

Don’t wait until you face an emergency to start saving for one. Open a dedicated emergency savings account today.