Emergency Funds: How to Prepare for the Unexpected

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Key Takeaways:
  • Emergencies aren't rare. You must expect and plan for them.
  • The average emergency costs $1,400. Most people should have at least $2,500 in basic emergency savings.
  • Credit cards and lines of credit can also work as emergency funding in a pinch.

Emergencies are not rare, unexpected things. In fact, nearly half of those who responded to a recent Lending Club survey said they had an emergency expense within the last 90 days. And the average cost was $1,400. Financial emergencies are common, and we should plan for them.  

An emergency fund can cover out-of-the-blue expenses and protect your finances. It’s your financial plan's foundation and starting point for a brighter financial future.

What is an emergency fund?

An emergency fund is money you set aside for unforeseen necessary expenses, or in case your income is interrupted. Examples include reduced working hours, a mandatory repair, or an ER visit. Without a rainy day fund, these could blow up your finances and derail your life.

Emergency funds are different from ordinary savings

  • Your emergency fund must be easy to access and completely liquid. This means any asset that takes time to sell doesn’t qualify. And don’t use an account that requires you to request a check or wire transfer during business hours. 

  • The money must be safe. Hold your emergency cash in an account that can't lose its value. It’s not an investment; emergency savings is more like insurance

  • An emergency fund shouldn't be subject to penalties. CDs with early withdrawal penalties or retirement accounts subject to tax surcharges don't make great emergency funds. 

Emergency funds must be easy to get but off your ordinary radar when needed. Keep emergency money separate from all other accounts. And don’t store your emergency account information on any shopping or bill-paying sites. 

Why is an emergency fund important?

Suppose your beloved pet becomes seriously ill, or the car you need to get to work dies. If you don’t have immediate access to cash, you may end up borrowing, and fast money tends to be very expensive. Think title loans, payday loans, and the like. And once you borrow, it can be hard (or impossible) to quickly repay the loan on top of your other obligations. 

What begins as a small emergency can cascade into a much larger problem. Worse, the delay in finding money could cost you your job or even a pet’s life. Not having an emergency fund can increase your stress and subtract from your sleep. 

On the other hand, having rainy-day cash can improve your monetary, physical, and emotional well-being. It’s a major step toward a healthy financial future. 

How much should you keep in your emergency fund?

A 2019 University of Colorado analysis suggests that the average household needs a $2,467 emergency fund. But even a few hundred dollars can remove a lot of pressure. Here's a short list of the average cost of some common problems:

  • Car repair $500-$600 (AAA)

  • Home emergency repair: $1,400 (iPropertyManagement)

  • Emergency vet visit: $800-$1,500 (Money)

  • ER visits out of pocket, if you’re well-insured: $646 (WebMD)

Starting right away and saving even a few hundred dollars can go a long way toward preparing for unforeseen costs. 

What about a potential job loss? Many experts recommend keeping three to six months of expenses in savings to cover a loss of income. How much you’ll need depends on the likelihood of losing income, your other resources (like insurance), and your current financial flexibility. 

Some experts recommend creating a special budget for serious problems. You’d subtract your “wants” like dining out, entertainment, travel, etc. and just keep the “needs.” Those would be:

  • Food

  • Shelter

  • Utilities

  • Transportation

  • Insurance

  • Childcare while you work

  • Minimum payments on your debts

This slimmed-down spending plan could drop hundreds or even thousands from what you’d need to cover living expenses during an emergency.

Questions to ask to figure out how much you need in your emergency fund

  • How much debt are you carrying? How much of your debt is backed by assets like your home or car? You don’t want to miss those payments.

  • How many breadwinners are there in your household? Can someone else cover the bills?

  • How solid is your job, your employer and your industry? How long would it take you to find a new job at the same salary level?

  • Are you self-employed, salaried, or on commission? Does your income fluctuate?

  • How well-insured is your health? Your home? Do you have disability coverage? A home warranty? Life insurance? You can save money by buying less insurance, but you’ll have to foot a bigger bill if something happens.

  • How reliable is your friends and family network? Are there people who could help you get through a financial crisis?

Two salaried earners with low debt, job security, and good benefits can get away with a smaller emergency fund than a household with one minimally-insured, self-employed earner in a risky line of work. If you haven’t saved a ton, consider reducing your risk by upping your job security. 

How to build an emergency fund

The most important thing you can do with your emergency fund is to start it now. Even if you can only save a few dollars each week. That’s because every week you don’t have an emergency is a week when you can grow your account and be a little safer than the week before. 

Here's a list of 6 S’s to help you start an emergency fund from scratch:

  • Sell. Get a jump on your emergency fund by selling unneeded things. Your favorite selling app or neighborhood garage sale will help you make cash out of them. 

  • Sacrifice. Find at least one regular purchase you can give up until your emergency fund is full. Redirect what you normally spend for that purchase into your emergency account until you meet your goal.

  • Slim down. Review your subscriptions and cancel everything you don’t use regularly. 

  • Spend cash. Keep your credit cards out of your wallet and be mindful of every dollar that leaves it.

  • Save some. Put at least some of any windfall you receive, like a holiday bonus or tax refund, into your emergency fund.

  • Set aside. Have part of your paycheck automatically deposited into an emergency savings account. 

These are great habits to start with at any point in your life journey. The extra savings is a nice bonus.

Best accounts for emergency funds

Emergency funds aren't retirement or investment accounts. Look for an account that's easy to use, has low or no fees, and pays the best savings account rate for its type. 

The three main account types best suited for emergencies are:

  • High-yield savings accounts

  • Money market accounts

What if you can't save for an emergency fund?

Saving for emergencies is challenging if you’re living paycheck to paycheck. Fortunately, there are other ways to backstop your wallet in an emergency. 

One of the biggest problems with being unprepared for unexpected expenses is that fast cash is costly cash. There are two ways to minimize this issue.

Option one, set up a cash advance app. There are free and low-fee apps that will give you a short-term cash advance of up to several hundred dollars, but you have to set them up in advance. Try Earnin, Chime, or Brigit. Boro is an app that offers 12-month emergency loans.

Option two, apply for a credit card and reserve it for emergencies. 

If you can’t get a new credit card but you have one or more active credit cards with a balance, try the savings methods above to pay down your smallest debt as quickly as possible. That paid-off account becomes your emergency card. 

An alternative to credit cards is a personal line of credit. If you can put up something valuable as collateral or get help from a co-signer, you may have an easier time getting approved for one. 

Again, the key to using credit for emergencies is to leave it alone unless you have an emergency.

Caught off guard by an emergency? Focus.

What if you experience an emergency and don’t have enough to cover it? That’s a serious situation, and you must spend only on necessities until the emergency is over. Immediately contact your creditors and ask for forbearance – the creditor’s blessing to miss one or more payments. Cancel everything you don’t need to earn a living or stay alive. 

If the emergency is long-term, you may require professional help to manage, settle, or discharge your debt. 

Concentrate on solving your immediate problem. Once the emergency has passed, work on preventing the next one.

Frequently Asked Questions

Should I focus on paying off my debt or building my emergency fund?

Paying off debt is the first priority. Available credit—like an untapped credit card balance—can function as cash for most emergencies. Paying down debt saves you interest charges and adds to your emergency cushion.

How long does it take to build an emergency fund?

Try to save the first $1,000 within 6-12 months. Be aggressive and make sacrifices. Challenge yourself to make a budget, look for ways to save, and set milestones to reach and celebrate. 

Here’s how one family of four might do it if their goal is to save $2,500. 

  • Drag everything unneeded out of the closets and sell it, netting $700

  • Give up two subscriptions: $40 per month

  • Shave 10% off the grocery bill: $60 per month

  • Switch mobile plans: $50 per month

  • Cut one restaurant dinner out: $100 per month

  • Cut 10% of driving: $25 per month

Goal reached in less than 7 months.

Where should I keep my emergency fund?

Keep your basic emergency fund in a no-fee savings account, separate from your other money but easy to access when needed (not just during business hours). A high-yield savings account is best, but the first priority is to make sure the money is accessible if you need it. If you have to wait two or three business days to transfer the money into your checking account, you might want to set up your checking account at the same bank, or use an online bank that will give you a debit card for easy access to your funds.