Starting (and Keeping) an Emergency Fund

By Janet Siroto · August 12, 2022 · 11 minute read

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Starting (and Keeping) an Emergency Fund

How many times have you heard the financial advice, “Start an emergency fund”?

Probably dozens of times. But much as most people would like to have an emergency fund, it can be hard to prioritize saving for a rainy day when the sun is out and you want to plan a beach getaway…or just pay your current bills.

But what would happen if your car conked out en route to the beach and you needed a $800 repair? Or if you were unfortunately laid off and couldn’t pay the pile of bills without reaching for your credit card?

Those are examples of why emergency savings are so vital. It can be especially hard to save, though, when you don’t know how to build up that financial safety net. This article will change that. It shares step-by-step advice about how to ensure that you can handle the unexpected expenses that can be part of life. Read on to learn:

•   How many people have an emergency fund

•   How much money you should have in an emergency fund

•   How to save for an emergency fund

•   Where to keep an emergency fund

•   When to use an emergency fund

What Percentage of Americans Have an Emergency Fund?

Only about 44% of Americans could pay for an unexpected $1,000 emergency expense, according to a recent survey. This means that for 56%, or the majority of citizens, their emergency fund is effectively their credit cards.

And remember, a sudden bill of $1,000 isn’t the only reason an emergency fund is crucial — it can also keep you stay afloat if you suddenly lose your job or need to take unpaid time off work.

When you consider how to define an emergency fund, you may think it’s just cash to pay those urgent, unexpected bills. And, yes, that’s vital. But if you turn it over a bit, you’ll realize that in addition to covering the out-of-ordinary expenses, it can also keep you out of debt and your phone number out of the hands of creditors. What’s more, an emergency fund should help prevent you from reaching for your plastic when a big bill hits. The idea is not to rack up that kind of high-interest debt, which can be so challenging to pay off. These situations underscore the importance of having an emergency fund.

Rule of Thumb When Saving for an Emergency Fund

Most financial experts say you should have at least three to six months’ worth of basic living expenses in your emergency fund. That means you should add up the necessities that keep your household afloat (such as shelter, food, medical costs, utilities, WiFi, and so forth) and see what you would need if, say, you lost your job, became disabled, or had to take a leave of absence from work to care for a sick family member.

When deciding how much you’d like to have in your emergency fund, you might use another technique vs. adding up all your monthly expenses. Some people prefer to start with their take-home pay, subtract any money they’re already saving, and subtract money they don’t need to spend.

With this method, what’s left are your monthly expenses. Another benefit of this method is that it gives you the opportunity to see what spending you can live without, which you can cut out of your budget now and start weaving into your safety net.

Some people recommend yet another way to calculate how much should be in your emergency fund. They say to look at the deductibles for auto and health insurance you would have to pay in the event of an accident, emergency room visit, or ambulance ride. That cost is the very minimum amount of money you would have to shell out for a minor misfortune. If money is super tight, that could be a good goal for your emergency fund.

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Steps for Starting and Building Your Emergency Fund

If you are convinced of the value of having this sort of savings and are wondering how to start an emergency fund, follow these steps. They’ll help you know how to save for an emergency fund even if you feel your budget is already quite tight.

1. Setting a Specific Savings Goal

As mentioned above, most financial pros will recommend that you save three to six months’ worth of living expenses. You might come up with that sum and then divide it by 12 to see how much you’d have to save monthly if you wanted to accrue the whole amount.

Too steep? Try dividing by 24, and see what the two-year horizon looks like.

2. Starting Small and Stockpiling When You’re Able

Most young professionals don’t happen to have three to six months’ worth of income just sitting in their checking accounts, waiting to be moved to an emergency fund. If the method above of dividing your goal by 12 or 24 still yields a monthly number that’s too intimidating, start with whatever you can afford. If it’s $25 per month, great: The point is to pick a number and start stashing some cash.

You can also look for ways to fund your account from other sources. For instance, you could deposit any minor windfall — a tax refund, bonus, or even a birthday check from Grandma.

3. Making Consistent Transfers

If you use the method above of putting a windfall into your account, don’t forget about the emergency fund after that. It’s important to keep adding to it, especially in periods of high inflation. The amount of money you’d need to, say, pay the heating bill or plunk down for a car repair is likely to go up over time.

That’s why it’s important to keep funneling some money into your savings. If you have a side hustle going, you might want to make a rule to always deposit 10% or 20% of your earnings into the emergency fund to keep that account growing. Sure, you could spend all that pay and feel rich in the moment, or you can save it and increase your wealth over time.

4. Managing Your Expenses and Spending

If you’re feeling as if you just don’t have wiggle room to fund emergency savings, there’s a simple solution: Manage your money better and cut your budget a bit.

Take a look, and see where you can make budget cuts. Do you need to eat dinner out three nights a week, or can you cut it down to one? Do you need all of those streaming services you pay for? See where you can eliminate some costs in your budget, and put that extra money towards your emergency fund.

5. Turning on Automatic Saving

Automating your savings is a great, relatively painless way to continue saving money for your emergency fund. Set up regular payments from your checking account into your savings account so that money automatically gets transferred on a weekly or monthly basis. You won’t see the cash in your checking and be tempted to spend it.

6. Not Increasing Your Monthly Spending

Are you familiar with the phrase “lifestyle creep”? This means that, as you earn more, you start spending more. This means that even as your income grows, you’re not building wealth. If you get a raise and then use it on a more expensive car lease or frequent vacations, your savings will struggle to increase.

If you keep your spending in check, you can apply at least some of your salary increases to building up that emergency savings account.

Where to Keep Your Emergency Fund

Now that you know how to start an emergency fund, consider where to keep it. The whole point of an emergency fund is that it is easily accessible money, so when and if the unexpected happens (like a big dental bill), you will be able to dip into your account. That means it needs to be liquid. You will likely want to avoid accounts that require your money to be kept on deposit for a certain amount of time, like a certificate of deposit (or CD) account. These typically penalize you if you withdraw the funds early.

Interest rates are often fairly low for savings accounts, but if you shop around, you’ll find some out there that pay almost 2%. These high-yield savings accounts are typically offered by online banks. Because they don’t have bricks-and-mortar branches and the related expenses, they can pass the savings along to their clients.

Another point to note as you build your emergency savings: Look for an account that is FDIC-insured . Putting this kind of money into the market, which means there’s risk of loss, is probably not a wise idea. You don’t want to have the value of the fund drop.

Adding to Your Emergency Fund

As noted above, it’s fine to take your time building up your fund, but if you don’t take the first step and start, you’ll never get ahead. If you are struggling (as many people do), to find the cash for this goal, consider these hints:

•   Start a side hustle. You could get a weekend gig walking dogs. Or do you love ceramics? Try selling your pieces on Etsy. There is no limit to what you can try, plus a key benefit of a side hustle is making some extra cash, which you can put towards your emergency fund.

•   Gamify your savings. One month, go without fancy coffee-bar drinks and put the money saved into your emergency fund. The next month, skip takeout and cook at home. Put the extra cash into your rainy day account. You are likely to see the amount climb.

Tips for Staying Motivated to Build Your Emergency Fund

One of the biggest challenges some people face in saving for an emergency fund is motivation. If you find yourself tempted to spend your yearly bonus on a new car or status wristwatch, try this instead: For one week, live on the money you’d get if you filed for unemployment in your state.

This is no easy task, and it will give you an idea of exactly what you’re saving up to avoid. If you make it a week, consider if that’s really what you want to go through if you lose your job with no backup in place. Once you commit to focusing on your emergency fund, use the money you didn’t spend that week to start your account.

While saving an emergency fund is one of many competing financial priorities, having a cushion to catch you when you fall can prevent a minor calamity from spiraling into lasting debt. The toughest part may be getting started and staying motivated. Just remember, you walk 10 miles by walking 10 feet at a time.

When Should I Use an Emergency Fund?

When you know you have funds in your emergency savings, it can be tempting to dip into it for a variety of reasons that feel urgent but in truth aren’t. For instance, if a coat you have been coveting is marked down by 60% off, that is not a valid use of your emergency fund. Nor is upgrading to the latest mobile phone because you see a good deal.

Here’s when you should use an emergency fund:

•   An unplanned, unexpected event

•   An expense that is absolutely necessary

•   A cost that cannot be covered any other way

•   An expense that is urgent and must be paid ASAP

Examples of when these situations might occur include a major car repair that must be paid so you can commute to work regularly or your home insurance plan’s deductible after you experienced storm damage.

If an expense meets the criteria above, you can breathe easier knowing that you have the money to take care of the bill.

Banking with SoFi

Starting and keeping an emergency fund isn’t the most exciting place to put your money, but it is one of the most important. By keeping at least three to six months’ worth of expenses in a liquid account that earns a bit interest, you will be rewarded with peace of mind and an important cushion if you should hit one of life’s unexpected speedbumps.

If you’re looking for a place to begin and grow an emergency fund, see what SoFi Checking and Savings offers. When you open a SoFi bank account with direct deposit, you’ll earn a competitive APY, and you won’t pay any account fees, so your money can grow faster.

Better banking is here with up to 4.20% APY on SoFi Checking and Savings.


Should I put my windfall towards my emergency fund?

Putting a windfall, like a tax refund or a bonus, towards an emergency fund can be a great idea. Instead of spending the money on a purchase, which is likely to be a passing pleasure, you can put the cash aside and enjoy peace of mind. If an unexpected, urgent bill comes up, you will likely be better prepared to pay it.

How much of my paycheck should go to my emergency fund?

It can be a good idea to calculate what your monthly living expenses are and then multiply that by at least three or six to determine your goal for your emergency fund; then see how much you need to save to reach that in a year or two. If you do like a specific guideline, some experts say to save 20% of your take-home pay for emergencies and retirement.

Does the 50/30/20 rule apply to emergency funds?

The 50/30/20 rule is, in part, designed to help people have funds on hand for an emergency (as well as save money for retirement). The idea is that you spend 50% of your after-tax income on needs, 30% on wants, and 20% on savings. How much of that 20% you allocate to an emergency fund will depend on your own personal situation and your other savings goals.

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