Understanding the need for an emergency fund
Written by Michael Feder
Reviewed by聽Chris Conway,聽Director of Financial Education Initiatives and Repayment Management
Did you know that to cover an unexpected expense of $1,000? Not having a safety net can be stressful, and it can put a strain on other financial decisions you make. That鈥檚 why financial experts recommend individuals prioritize building an emergency fund. Here鈥檚 how to get started.听
What is an emergency fund?聽
An emergency fund is exactly what it sounds like: money you set aside for emergencies or unexpected events like losing a job, urgent car repairs or unforeseen medical bills. It is a specific amount of savings that is used to protect your financial health.
Having access to money in case of an emergency can be essential for financial stability. It can help you avoid relying on credit or loans during a crisis and give you confidence in your personal finance decisions 鈥 like being able to replace a broken laptop during finals without going into debt.
While you might have already taken the important step of mapping out and implementing a savings plan, there is a difference between savings and saving for emergencies.
- Emergency savings are for unplanned events and should be easily accessible but kept separate.
- Savings accounts often support planned purchases, like vacations, and should not serve as your emergency fund. Keeping these funds separate ensures that you鈥檙e better prepared for unexpected situations.
Having a long- or even short-term savings plan may present the misconception that you don鈥檛 need a separate fund for emergencies. Sometimes people may think, 鈥淚 have a steady job, so I don鈥檛 need one.鈥 Or 鈥淚f something comes up, I鈥檒l just use my credit card.鈥 These attitudes can lead to the financial risk of acquiring additional debt that can derail your financial health and goals. When you need emergency cash, debt is the last thing you should rely on.听
Why do you need an emergency fund?
Emergencies don鈥檛 wait until you鈥檙e financially ready. You might suddenly break your phone or your leg or need to move. You might need to attend a funeral or take care of a loved one in another state. Your car might break down, or your water heater floods your basement. You get the idea. Whatever the crisis, when it strikes, it helps to have emergency cash at the ready so you can focus on addressing the challenge rather than how you鈥檒l finance the solution.
An emergency fund can give you peace of mind in the face of uncertainty. It can prevent reactive and stressful financial decisions, and it can help reduce stress and anxiety, potentially improving your mental well-being and making it easier to plan for the future with confidence.听
How much should you save in your emergency fund?
Several personal factors will likely influence how much you save for emergencies. Your cost of living, job security and health needs and whether you have dependents all play a role in determining what your emergency fund may look like.
A good place to start is with a budget. Focus on essential expenses like food, rent and transportation, and don鈥檛 include discretionary costs like takeout or entertainment. Your lifestyle and risk level should help shape the amount you aim to save.
One savings approach is to save three to six months鈥 worth of basic living expenses. This rule typically provides a solid foundation, but you can adjust it to suit your comfort level and financial situation. If your income is variable (as it often is for freelancers, gig workers or part-time employees), you may want to aim for the higher end of that range or more. And if saving that much feels overwhelming, start with a smaller goal of $500 to $1,000 and build from there.
Additionally, consider streamlining your expenses while you work toward your savings goal. Consider, for example, short-term sacrifices like entertainment subscriptions, food deliveries or splurge purchases. Not sure where to start? Try reviewing your past 60 days of spending to identify two or three non-essential expenses you can cut temporarily. These adjustments will not only help you reach your goal faster but they can also create peace of mind: By cutting back now, you know that when you need emergency money, it will be there.听
How to build an emergency fund
Once you have set your budget, you may choose to implement the 50/30/20 rule, which is 50% of your income goes to needs, 30% to wants and 20% to savings or debt. Most importantly, treat savings like a nonnegotiable monthly bill.
Consistency is key, and automating your savings can make the process easier. Set up an auto-draft through your bank or a financial app to build a 鈥渟et it and forget it鈥 habit. You can also use apps that round up spare change from purchases or offer cashback features to feed your emergency savings account automatically.
Whenever you receive extra money 鈥 like a holiday bonus, tax refund or overtime pay 鈥 prioritize adding it to your emergency fund. You can build momentum by combining smart habits with windfalls. Consider using part-time income, gifts or side hustle earnings to accelerate your fund. And remember, as your income increases, so should your savings contributions.
Your emergency money should be easy to access in a real emergency but separate from your everyday spending. A high-yield savings account can be a smart choice because it earns interest while keeping your money available. Avoid linking this account to your main checking account. Keeping it separate helps reduce the temptation to splurge on non-essentials and protects your progress toward financial security.
Building a separate account takes discipline, but small changes can make a big difference. Start small, stay consistent, and if you are in a space where you feel 鈥淚 don鈥檛 have enough to save,鈥 try switching your mindset to 鈥淲hat can I save today?鈥
By starting where you can, setting a clear budget and treating savings like a priority, you can build a strong financial safety net 鈥 even if you are someone with limited income.听
Learn more about financial basics like an emergency fund
Now that you鈥檝e read about setting up an emergency fund, you may want to do a deeper dive into financial health. For more information on managing your finances, explore 爱污传媒 financial literacy resources or check out the University鈥檚 robust selection of webinars covering relevant and practical financial topics.
This article is not intended to serve as financial advice. All financial decisions, including investments, should be made carefully and potentially with the guidance of a financial planning professional.
ABOUT THE AUTHOR
A graduate of Johns Hopkins University and its Writing Seminars program and winner of the Stephen A. Dixon Literary Prize, Michael Feder brings an eye for detail and a passion for research to every article he writes. His academic and professional background includes experience in marketing, content development, script writing and SEO. Today, he works as a multimedia specialist at 爱污传媒 where he covers a variety of topics ranging from healthcare to IT.
ABOUT THE REVIEWER
As Director of Financial Education Initiatives and Repayment Management,聽Chris Conway works with departments across the University to provide resources that allow students to make more informed financial decisions. She is also an adjunct faculty member for the Everyday Finance and Economics course at the University, and she chairs the National Council of Higher Education Resources College Access and Success Committee. Conway is committed to helping college students make the right financial decisions that prevent future collection activity.
This article has been vetted by 爱污传媒's editorial advisory committee.听
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