According to a January 2025 survey by U.S. News and World Report, an estimated 42 percent of Americans don’t have an emergency fund, while 40 percent of those polled said they couldn’t cover an unexpected $1,000 expense.
Emergency funds are designed to provide a financial cushion in the event of an unexpected expense (e.g., medical bill, car issue, household repair, etc.) or job loss, but studies indicate that too few Americans have one.
Starting an emergency fund isn’t difficult. It just takes commitment and discipline. In this post, we’ll discuss the importance of an emergency fund and how to start one.
What is an Emergency Fund?
An emergency fund is money set aside specifically for unexpected expenses. Often referred to as a “rainy day fund,” it is advisable to create a separate savings account dedicated solely to these unforeseen costs. Emergency funds can be used for a variety of reasons, such as flat tires, broken appliances, medical expenses, or even loss of household income. They are designed to help cover emergencies that you may not have anticipated. Without an emergency fund, many people resort to using credit cards or taking out loans to pay for these expenses, which can lead to larger long-term repayments and increased debt.
Why You Need an Emergency Fund
No one wants to be caught off guard when faced with an unexpected bill or expense that they can’t afford. However, life can be unpredictable. An emergency fund offers peace of mind and helps you navigate unforeseen circumstances, such as job loss, medical bills, or other sudden expenses that could threaten your financial stability.
Another advantage of having an emergency fund is that it helps you avoid accumulating debt. By saving money in advance, you can pay for unexpected expenses in cash, which prevents interest fees from credit cards or loans and keeps your debt levels in check.
How Much Should You Save in Your Emergency Fund?
Ideally, you’ll want to save three to six months’ worth of household expenses. These expenses include rent or mortgage payments, utilities, loan payments, etc. This amount should be enough to cover an unexpected expense or buy yourself time to find a new one in the event of a job loss.
Three to six months of household expenses can be significant, depending on your situation. Know that you don’t have to save this all right away. Start by saving $1,000 and add it to your emergency account immediately. The more you save, the better prepared you’ll be when the unexpected happens.
Steps to Start an Emergency Fund
Create a Budget
If you don’t have a budget, the first thing you should do is create one. Find a budgeting system that works for you, like the 50/30/20 model or the zero budget technique. For a sample budget sheet, see this template on our website.
To set your budget, you need to know your monthly household income and expenses. If your expenses outweigh your income, find ways to cut them down so that you have extra room to start saving. One way to do this is by thoroughly evaluating your priorities, needs, and wants.
Once your budget has been created, test it for a few months and adjust line items as necessary.
Set a Target
How much do you want to have in your emergency fund? Before you can start saving, you need to define your goal. While the end goal is ideally three to six months’ worth of household expenses, starting small and building your savings over time is OK. Just be sure not to lose sight of your target goal.
Automate Savings
Once your budget is complete and you’ve found extra income to put towards your emergency fund, you need a savings account to keep it in. If you don’t already have a specific emergency fund bank account or savings account, consider the options offered by HFS FCU.
Once you have a savings account ready to add funds, it’s time to start setting money aside. One of the easiest ways to do this is to have your paycheck directly deposited into your checking account and then arrange to transfer a portion to your emergency savings account automatically. Automating savings like this ensures you’re staying true to your budget and prevents you from inadvertently spending money from your emergency savings.
Start Small
As we’ve said, three to six months of household expenses is the end goal for your emergency account — but you shouldn’t expect to hit this goal overnight. Start small and continue to build up your account. Additionally, if you’re in a situation where you’re increasing your income or reducing your expenses, be sure to adjust your budget accordingly to build your emergency savings faster.
Avoid Temptation
Effectively building your emergency account has as much to do with discipline as it does with budgeting. To stay disciplined and avoid the temptation of tapping into your emergency account to fund other expenses, consider these tips:
- Keep your money in a less accessible account.
- See if your bank or credit union can “lock” the account to prevent unauthorized withdrawals.
- Set clear definitions of what qualifies as an emergency for your household.
Where to Keep Your Emergency Fund
We suggest a high-yield savings account for your emergency fund. These accounts feature higher interest rates than conventional savings accounts, helping you grow your account faster and making your money work harder for you. You might also consider a money market account, which typically offers competitive interest rates while allowing relatively easy access to your funds.
Additionally, we suggest an FDIC/NCUA-insured account. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insure deposits at banks and credit unions, respectively, so you can rest assured that you’ll be able to recover your money if the unthinkable happens.
Tips for Growing Your Emergency Fund Faster
Want to grow your emergency fund faster? Aside from opening a high-yield savings account, you can use other strategies to meet your goal. These include:
- Allocating a portion of any bonuses or tax refunds to your emergency fund.
- Increasing your contributions to your emergency fund over time as your earnings increase.
- Identifying ways to reduce expenses and allocating any excess income to your fund will put you better positioned to cover unexpected expenses when they arise.
Common Mistakes to Avoid When Building an Emergency Fund
Two of the most common mistakes people make when managing their emergency funds are using them for non-emergencies and not replenishing them after use.
The best way to avoid these pitfalls is to identify what constitutes an emergency and only use funds for such expenses. Additionally, remember your end goal for your emergency account. If it ever dips below that end goal, you’ll need to adjust your monthly budgeting to get back to it.
Maintaining and Replenishing Your Emergency Fund
In a perfect world, the money in your emergency savings account is money you never have to spend. Yet, life happens. Noting this, it’s also important to maintain and replenish your emergency fund over time. Some best practices for this include:
- Replenish funds or adjust your budgeting following a withdrawal.
- Review and adjust your emergency fund amount or end goal regularly based on lifestyle changes. For instance, if your utility bills go up, make sure this is reflected in your savings.
- Don’t be afraid to continue saving even after reaching your goal.
Secure Your Financial Future
Take action today and have financial peace of mind when life inevitably happens. An emergency savings fund can offer that cushion to pay for unexpected expenses or help you buy time in a sudden job loss. They’re easy to open and can help quickly put you on the path to reaching your savings goals.
Start Your Emergency Fund with HFS FCU
For more information on the importance of an emergency savings fund and how to start one, contact HFS FCU today. Our high-yield savings accounts represent ideal options for emergency savings, and we also offer numerous financial planning resources to help you set a savings strategy to meet your goals. Contact us today to learn more.
FAQs
How fast should I build my emergency fund?
While you should save anywhere from three to six months’ worth of household expenses, how fast you build it depends on how you budget to meet your goal. It’s OK to start small and build your way up.
What’s a realistic first goal when creating an emergency fund?
It’s OK to start small with your emergency fund. Try starting with $1,000 and working your way up to your goal.
Where should I keep my emergency fund?
We suggest keeping your emergency fund in an account that works harder for your money and is not as easy—or as tempting—to access. A high-yield savings account is ideal because it has a higher interest rate and can help you meet your goals faster.
Can I use my emergency fund for regular expenses?
No, you should not use your emergency savings fund for regular expenses. We suggest clearly defining what constitutes an “emergency” and only using it to fund such expenses.
How do I balance saving for emergencies with paying off debt?
Consider prioritizing high-interest debt in your budget while still allocating funds for your emergency savings account.
What are the best tools or apps to help automate emergency fund savings?
Some of the best apps for staying disciplined as you build your emergency fund include Acorns, Chime, PocketGuard, and Monarch Money.
