August 21, 2024

Emergency Fund: What It Is & 8 Steps to Start One

You’ve probably dealt with an emergency or two before, maybe an unexpected car repair or an urgent visit to the vet for your sick pet. Even after the problem is dealt with, the impact on your budget can live on.

Emergencies are a normal part of life. When they arise, you can’t wait for your next paycheck to come in; you need money ASAP. That’s when an emergency fund comes in handy. Let’s lay out the benefits and show you how to start an emergency fund.

What is an emergency fund?

An emergency fund is a dedicated pool of money you set aside to cover any urgent and unexpected financial needs you may have, from car repairs to medical emergencies and beyond. It’s an essential part of any financial plan.

Unfortunately, many American households lack sufficient savings to weather financial emergencies. According to a 2022 survey by the Federal Reserve, 37% of Americans would struggle to cover an unexpected expense of $400.

Similarly, a report by Bankrate indicates that only 41% of adults have enough savings to cover three months of living expenses, while 25% have no emergency savings at all.

How to build an emergency fund

These steps will help you start an emergency fund:

1. Set clear goals

Determine your emergency fund’s ideal size based on your circumstances. As a starting point, you might try to save $400, putting you ahead of the nearly 40% of Americans who don’t have such savings handy. As a larger goal, aim for three to six months' worth of living expenses.

2. Create a budget

Establish a budget—perhaps using an online budget tool, that includes your income, expenses, and savings goals. Set aside a portion of your monthly income for building the emergency fund.

3. Start small, be consistent

The portion of each paycheck you set aside can be small to get your emergency fund off the ground. Consistency is key, even if you can only contribute a modest amount.

4. Automate savings

Set up direct deposits or automatic transfers from your primary account to your emergency fund savings account. This makes sure you’ll contribute consistently without the temptation to spend or invest the funds elsewhere.

5. Reduce discretionary spending

Look for opportunities to cut back on non-essential expenses and redirect those savings to your emergency fund. Personal finance gurus often recommend cooking at home, finding a cheaper cell phone plan, and taking advantage of lower-cost entertainment options, like streaming TV.

6. Watch for windfalls

If you come upon somee unexpected money like a tax refund, side gig, or gift (congrats!), put some of it toward your emergency fund.

7. Keep paying down debts

While building an emergency fund, keep making at least your minimum debt payments, but consider focusing on savings until the fund reaches your goal. Once the fund is established, you can keep the momentum going by putting more money toward your debts.

8. Monitor & reevaluate

Review your progress as you go and adjust your budget and savings plan as needed. Reevaluate your emergency fund’s size based on changes in your financial situation or life circumstances. As you take on more in life, you’ll want a bigger emergency fund to match.

Why do you need an emergency fund?

Those statistics—and the “predictably unpredictable” nature of emergencies—highlight the importance of building and maintaining an emergency fund.

When you’ve got some emergency cash stashed away, you don’t need to resort to high-interest loans, credit-card debt, tapping home equity, or asking friends and family for help. You save yourself the additional hardships of financial stress and worry, which is no small thing.

An emergency fund becomes even more vital in times of economic uncertainty, like during a recession or downturn. The added security allows you to weather those inevitable hard times, boosting your overall financial stability and ensuring you and your family suffer fewer disruptions.

Protection, flexibility, peace of mind—an emergency fund can provide all these things. It empowers you to face economic uncertainty with strength and confidence.

An emergency fund also frees you to focus on longer-term financial goals. Once you’ve established one, you can focus on saving and investing for bigger goals, like education, retirement, a home, or a much-needed vacation.

Where to keep emergency funds

The best place to keep your emergency fund is in an easily accessible account, like a checking, savings, or money market account.

A traditional savings account at a neighborhood credit union or a high-yield savings account with a bank are both excellent options that provide safety, liquidity, and easy access to your funds whenever an emergency arises.

For example, you could consider stashing funds in a separate, high-interest savings account specifically designated for emergencies. Look for an account with low or no fees, no withdrawal restrictions, and a competitive interest rate.

Double check that the financial institution has FDIC insurance—that is, government-provided protection of deposits, usually up to $250,000 per account or account holder. This is a typical feature at many banks, but not all. Most will have the FDIC logo visible on their website.

Be warned: Keeping an emergency fund in a brokerage account isn’t as wise. Any emergency fund investments you make could tie up your funds, which defeats the purpose of having an emergency fund. You’d be back at square one, trying to figure out how to get money in an emergency.

How EarnIn can help you reach your goals

Emergencies are inevitable, but you can make financial plans for dealing with them well ahead of time. That's where EarnIn comes in. With our innovative app, EarnIn offers tools that empower you to take control of your finances and navigate unplanned challenges with ease.

EarnIn's popular Cash Out tool lets users access their earned wages before their scheduled payday. This way, if an emergency or other unplanned event occurs, they have the cash they need to handle it promptly. Or better yet, you can make sure you’re building your emergency fund by adding to it as you work instead of waiting on a paycheck.

The Cash Out tool lets users leave an optional tip. This flexibility makes sure users can access their earnings any time without resorting to costly loans or credit card advances.

But EarnIn goes beyond fast access to earnings by providing valuable financial insights and tools to support better money management. Our app also features a Tip Yourself savings account, and Balance Shield to set alerts on low balance levels on your bank account, all designed to help you stay on top of your finances and budget effectively.

Whether you’re building an emergency fund, managing unexpected expenses, or simply taking charge of your financial life, EarnIn's user-friendly app and tools will help pave the way. Download the EarnIn app today and embrace a new era of financial flexibility and empowerment.

Disclaimer: Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.