Emergency Fund: How Much to Save & Where to Keep It

The car breaks down and needs an expensive repair. You lose your job. A family member has a medical emergency. How will you pay for these unexpected expenses? Enter the emergency fund.

This type of rainy day fund is money you set aside long before there’s an actual crisis. (Phew!) Having emergency cash in the bank helps you face emergencies without building debt, taking out a high-interest loan or paying penalties to withdraw retirement funds.

Don't have emergency money yet? You're not alone. 69% of Americans have less than $1,000 in savings, and 34% have nothing saved at all.¹ If you’ve decided your emergency fund begins today, congrats! These tips can help you get started.

How much should you have in an emergency fund?

The emergency fund amount you’ll need depends on your situation. Most experts recommend having 3 to 6 months of living expenses saved for a rainy day if you’re single and close to a year’s worth if you support a family.²

OK, take a deep breath. While the Federal Reserve Bank says that $2,000 is the average amount a person may need to solve a crisis, even a smaller goal of $250 to $500 can kick-start your safety net.³ Still not feeling realistic? Set aside any amount you can.

How do you build an emergency fund?

Choose a small, achievable amount and simply get started. Can you sock away $16 per week? In 6 weeks, you’ll have $100 in savings. If you can only spare $10 per week, then you’ll have $100 in 10 weeks. Your emergency fund has begun. Now, here are some ways to keep the momentum going:

• Put your savings on autopilot: Set up an automatic savings plan to move a set amount of cash from checking to savings each month.

• Keep an eye on your checking account: Is there still money left over after paying the bills? If so, move some into savings, so you don’t spend it.

• Make your tax return work for you: Nearly 8 out of 10 Americans get a tax refund each year, at an average of about $2,900. Stash those Benjamins in your emergency fund or sock away half and pay down debt with the rest.⁴

• Create an influx of cash: Have a garage sale or give up cable. Find other ways to save money fast.

• Pay off debt: If you have credit card debt, call the credit card company and ask for a lower interest rate. Even better, see if you can transfer the balance to a no-interest credit card so you can pay off debt even faster.

Can you start an emergency fund if you have debt?

Many people wonder if they should start an emergency fund or pay off debt. The answer depends on your situation, but most experts advise paying the minimum on the credit card while building up your savings.⁵

Although it makes sense to pay off high-interest cards first, it’s helpful to continue setting aside money for your emergency fund as well. If you face an unexpected expense, and there’s no emergency fund to fall back on, you may end up racking up more credit card debt and continuing the cycle.

Where should you put your emergency fund?

When it comes to where to keep your emergency fund, it might seem like a good idea to put it in a high-yield account, like a CD, or use it to buy stocks. But CDs require that you lock in the money for a set amount of time, so the cash won’t be available until the period ends.⁶ And if you invest your emergency fund and need to access it, you may have to sell the stocks at a loss.⁷

It may make sense to keep an emergency fund separate from other accounts, however, so you’re not tempted to dip into it. A savings account is a good option because you can access the cash whenever you need it. Some experts recommend using a Roth IRA as an emergency fund because the money can grow tax-free and can be accessed without penalty.⁷

With some planning and determination, you can build an emergency fund you’ll be proud of. And once you have that stash, not only can it offer protection during tough times, but it can free you up to start saving for other goals.

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