How to Build an Emergency Fund

It’s a key component of any sound financial plan

Fact checked by Marcus Reeves
Reviewed by Pamela Rodriguez

Having an emergency fund is a necessity. Think of it as a shock absorber for the bumps of life, one that’ll keep you from adding to the load of debt you most likely already carry.

Read on for details on how to build an emergency fund and just how much you’ll need to save for it.

Key Takeaways

• An emergency fund is essential for keeping your finances on stable ground.
• The rule of thumb is that you need to keep between three and six months’ worth of household expenses in your emergency fund.
• To build your fund, you should find ways to economize and contribute those savings—along with any financial windfalls—to it.

What Will You Need?

While some call having one to two months’ wages in reserve ideal, most financial experts say that the recommended emergency fund amount should cover three to six months’ worth of household expenses. For most people, this requires a good deal of effort to achieve.

The first step is to figure out how much you spend each month. According to 2023 data released by the U.S. Bureau of Labor Statistics, the average annual expenditure per consumer unit (which is similar to a household) was $77,280. This would put the average household’s monthly expenses at $6,440. With this number, a fully-funded emergency fund would be $19,320 to $38,640.

Why So Much?

The amount of money required to populate a proper emergency fund is certainly significant, but we live in uncertain times with uncertain economies. Unemployment can happen unexpectedly, often at the worst possible moment. Emergencies such as a sudden illness, major car repairs or a new roof can be expensive, and there’s never a good time for these things to happen.

While it’s probably true that you don’t have an extra $19,320 to $38,640 lying around, everything is relative. Even six months’ worth of expenses is a puny number compared to the amount you will need to save for retirement, and there’s not a savvy investor out there who balks at the idea of stashing away so much money that they will never need to work again.

Important

Though the amount of money needed in your fund may seem daunting at first, remember that it is a drop in the bucket compared with the amount you will have to save for retirement.

Crunching the Numbers

With that perspective in mind, let’s consider how to save for an emergency fund. Approach this effort the same way you would approach any other financial goal. Put together a plan and execute it.

The first step is to determine how much you spend each month. Housing, transportation, and food will likely be the categories that eat up most of your cash. The average household spends 62.8% of its income, which averages $101,805 before taxes, on these items, according to the BLS Consumer Expenditures report.

Once you know your total expenses for each month, multiply that number by three. Reaching that number will be your initial goal. To achieve your three-month target, you need to start saving money. It’s also helpful to break down your main goal into smaller goals.

If we assume your initial goal is $10,000 (about half of the average three-month fund), the table below illustrates how much you will need to save each month, over a five-year or two-and-a-half-year period. (To get to the average three-month fund amount, just multiply this by two.)

Putting Your Plan into Action

There are many ways to build your emergency fund. You could buy a less expensive car. Downgrade your cell phone serve. Cancel a few subscriptions. Skip that two-week vacation. Cut down on the amount you dine out. And save your next raise or bonus. All of these could help.

It’s also important to try to add to the fund at regular intervals. Ideally, you should treat it like any other recurring bill you must pay each month. Dedicate the appropriate amount from your paycheck and set it aside. Make it automatic. Pay yourself first.

You could also look into micro-investing platforms, such as Acorns, that round up purchases made from linked accounts and collect and invest the change.

If you get cash back on your credit cards or just paid off a big debt, such as a personal loan or a vehicle, put that newfound money into your fund. If you get a tax refund, deposit the check into your fund.

If you manage to dedicate just $5 per day to your effort, you’ll have $1,825 at the end of the year. That’s $9,125 in five years.

Where to Put Your Money

Money market funds and high-interest savings accounts are two good places to park your emergency fund. You need safe, liquid options so that your money is accessible in times of need. These choices make it harder for you to dip into it, and you’ll also earn a bit of return on your money.

What Is an Emergency Fund?

An emergency fund is a liquid account—that is, the money is easily converted to cash. It’s typically a high-yield savings account. Experts suggest that you keep between three and six months’ worth of expenses in the account. You reserve this account for emergencies only—if you lose your job, for example.

How Many People Can Afford an Unexpected $400 Expense?

In 2023, according to the Federal Reserve Board, about two-thirds of American adults (63%) could pay for a $400 expense with cash or its equivalent (such as from a checking or savings account).

How Many People Have 3 Months of Emergency Savings?

According to the Federal Reserve Board, in 2023, 54% of American adults had three months of emergency savings.

The Bottom Line

Having an emergency fund gives you a better shot at weathering a crisis without running up a credit card balance or taking out a personal loan.

Use the fund only in the event of an emergency and spend it carefully when you do need to draw on it. It might take longer than you expect to replenish it if you do take money out of it. If you’re building your fund, try to save whatever you can, even if it isn’t much. And start soon. Or start now.