How To Create An Emergency Fund

We all know that life can sometimes shock us with unexpected situations and financial challenges. When that happens, coming up with the money to cover the expense can feel overwhelming if you haven't planned ahead. Here are some common examples of difficult events life could throw at you:

  • Job loss
  • Medical bills
  • Home or car repairs
  • Family Emergency (e.g., Accident, death)
  • Natural disasters

An emergency fund is designed to give us the resources to cope with these unfortunate circumstances without having to rely on loans or credit cards.  Creating an emergency fund has many advantages, but also requires some planning and strategy.

Emergency Fund: What It Is and Why It Matters

An emergency fund is an essential part of a solid financial plan. It is a savings account set aside for unexpected expenses, such as medical bills, car repairs, or job loss. Unfortunately, according to a Bankrate financial security survey, only four in 10 Americans have enough emergency savings to cover an unplanned $1,000 expense. Without an emergency fund, your only options may be credit cards, personal loans or asking relatives or friends for money. This can be stressful and embarrassing if you don’t have the funds readily available. Building up an emergency fund is one of the best ways to ensure that you are financially secure and prepared for any unexpected expenses that may arise.

Emergency fund statistics

Having an emergency fund is a crucial part of financial planning. Nevertheless,  statistics show that many Americans are not prepared for unexpected expenses. More than half of Americans have less than three months' worth of savings in an emergency fund, and 57% of millennials have no emergency savings or couldn't cover three months' worth of expenses. Additionally, 44% would pay for a $1,000 unplanned expense with their savings, while 20% would use a credit card.

The gender gap also plays a role in how much people are able to save for emergencies. 57% of women are unable to cover more than 3 months' worth of expenses, compared with 44% of men. On the other hand, 27% of men can handle half a year's worth of expenses, compared to 23% of women.

How much do I need in my emergency fund?

Having an emergency savings fund is essential for financial security. Unexpected expenses can arise at any time, so it’s important to have a plan in place to cover them. The amount of money needed in an emergency savings fund depends on individual circumstances, but financial experts recommend having three to six months of household expenses saved up.   Monthly expenses might include:

  • Rent or mortgage
  • Car payment and transportation costs
  • Insurance 
  • Tuition 
  • Groceries 
  • Recurring medical expenses (e.g., Insulin)
  • Loans (e.g., Student, business) 

To come up with the recommended amount, consider past unexpected expenses and set a goal for how much should be saved. Even small amounts can provide financial security and there are various strategies to help save money. According to the Bureau of Labor Statistics, the average annual expenditure per consumer unit was $60,060 in 2017. With this figure in mind, individuals can calculate how much they need to save for their emergency fund based on their own personal needs and budgeting goals.

How do I build my emergency fund?

The first step to building an emergency fund is to start saving by managing cash flow or putting away a portion of your tax refund. This will help you get into the habit of saving and create a foundation for your savings plan. Different strategies exist to get savings started, depending on ability to save and pay fluctuations. For example:

  • If you have irregular income, you may want to consider setting aside money each month when you receive payment so that you are able to save consistently.
  • If you have regular income, you may want to consider setting up automatic transfers from your checking account into your savings account each month.
  • If you receive bonuses or other forms of income throughout the year, it may be beneficial to put away some of this money as well.

No matter what strategy works best for your situation, it is important to consider all available options in order to maximize your potential for saving

1. Start with small, regular contributions

Starting to save money can be a daunting task, especially when you’re trying to build up a large emergency fund. To make it easier, start with small, regular contributions. Cut back on other expenses and commit to regular intervals of saving. This will help you form a habit and make it easier to reach your long-term goal.

Set milestone goals along the way to reduce frustration and risk of de-motivation. For example, start by building up $500 in emergency funds, then $1,000, then $2,500. Tracking your progress is important so that you can see how far you have come and stay motivated until you reach your long-term objective of one month or three months or six months covered. With small steps and dedication, you can easily build up an emergency fund that will provide financial security for years to come.

Many banks let you create individual savings goals within your account that you can name, nest and protect - try to use a bank that offers a high APY so that your money works harder for you.

2. Save unexpected income

Receiving an unexpected financial windfall can be a great opportunity to improve your financial situation. However, it is important to remember that 70% of people who receive a financial windfall will have none of it left after a few years. Therefore, it is essential to use this money wisely and plan for the future.

One of the best ways to use unexpected income is to add to an emergency fund. Financial advisors recommend saving three to six months of living expenses in case of job loss or other unexpected expenses. Even if saving a large amount seems unrealistic, it is still beneficial to save whatever you can afford. Unexpected money can come in the form of a tax refund, bonus, cash gift, inheritance, or winning a contest or lottery; no matter what form it takes, make sure you are using it wisely and planning for the future.

3. Automate your savings

Automating your savings is a great way to ensure that you are consistently setting aside money for the future. By setting up an automatic transfer from your regular account to your savings account, you can easily and quickly save money without having to think about it. It’s important to set up a separate account for your emergency fund and have contributions deposited automatically into this account. This way, the funds are not easily accessible and you won’t be tempted to spend them. Additionally, try not to watch the balance of this account too often; let time do its thing as your savings grow over time.

When automating your savings, choose an amount, date and frequency that works best for you. For example, if you get paid bi-weekly then set up the transfer on those days so that the money is saved as soon as it’s deposited into your account.  One efficient solution is to link your direct deposit to a bank that lets you automatically divert funds to protected savings account.  This will help you stay on track with saving and ensure that you are consistently putting away money

4. Keep saving after reaching your goal

Expenses tend to rise with age - each phase of life comes with its own added expenses.   

  • Starting a family may increase household expenses. 
  • Aging parents may result in unexpected household expenses.
  • Aging may impact expenses as health tests (and bills) rack up

Put simply, a savings plan is like a sliding scale that should adjust with the demands of your household and life stage.  Saving money is an important part of financial security, and it’s important to have a goal in mind when you start; it's also important to shift the goal as your life evolves.

Once you reach your savings goal, don’t stop saving! Establishing a savings habit requires discipline and consistency, but the rewards are worth it. Regularly putting money towards an emergency savings fund can help build financial security and provide peace of mind that you have something

5. Where to put your emergency fund?

An emergency fund is an important part of any financial plan. It's essential to have quick access to the funds in case of an emergency, so it's important to choose a safe place to store the money. A high-yield deposit account or high-yield savings account are great options for storing an emergency fund. These accounts are insured by the FDIC or NCUA up to $250,000 per depositor, so your money is safe and secure. Online-only banks typically offer higher yields and lower fees than brick-and-mortar banks, so it's worth comparing rates and features regularly to make sure you're getting the best terms for your emergency fund. With a high-yield savings account, you can rest assured that your money is safe and accessible when you need it most.


HM Bradley, Inc. (HMBradley) is a financial technology company, not a bank. The information above is for informational purposes only and is not legal, financial, or tax advice, and it may not be suitable for your individual needs; speak to a licensed financial advisor who can help you tailor a plan for your specific needs.