An emergency fund is some money you put aside as a safety net if you have an unexpected expense.
Such financial emergencies can occur on different occasions.
What Is An Emergency Fund For?
Here are some scenarios to give you an example:
- you’ve suddenly lost your job
- you are having car problems
- you need to repair your house, or buy home-appliances
- you have a medical emergency and medical bills to pay
- a (very unexpected but very real) global pandemic
For all of the above reasons and more, it is always a good idea to save some money for a rainy day, as some might say.
What Is An Emergency Fund NOT For?
Though this is pretty self-explanatory, it’s worth repeating.
An emergency fund is not a place where you should store the money you need for anything that’s not an emergency.
I am saying this because we’ve all had the temptation to use the money we’ve set aside for our emergency fund for trivial reasons. It’s crucial to avoid that.
Try your best not to use your emergency money for non-emergencies because you might end up regretting it (and it will be too late).
Examples of non-emergency scenarios:
- buying that new TV that you’ve always wanted
- remodeling your house
- taking a long vacation
- going to a destination wedding
- having plastic surgery for aesthetics reasons, not health issues
I think you understand what I mean and can come up with your own examples by now.
I know that some of these things may seem like a priority at some point in your life, but could you survive just fine without them?
If the answer is yes, then do not use your emergency funds to get them.
Do I Need an Emergency Fund?
Most people need an emergency fund, if only for peace of mind.
You never know when you’ll need some extra money, and it’s better not to be caught unprepared by life events (especially ones that aren’t positive).
You might think that you work in a safe industry, so you’ll never get laid off, or that you’ll never have a sudden health problem.
But I’m sorry to tell you that 6 in 10 Americans have had at least one financial emergency this year!
It’s always best to think positive but prepare for the worst.
Sometimes the emergency might not even be directly coming from you. What if a family member who lives in another state needs your immediate assistance for medical reasons, and you have to leave your job, even if only temporarily?
Or what if your pet needs surgery? The vet is costly, and you certainly can’t predict these kinds of events.
Without an emergency fund, if there’s a financial emergency, you’ll most likely risk credit card debt, or you’ll have to borrow money from the bank quickly. You’ll have no choice but to agree to high-interest loans.
If you build an emergency fund, you’ll be able to avoid these unpleasant situations – and feel a lot more at ease about your financial situation, no matter what happens.
Where Do I Put My Emergency Fund?
There are several accounts where you could put your emergency fund.
If possible, always choose an FDIC or NCUA insured account, so your deposits will always be safe.
The most common ones are:
High-Yield Savings Accounts
Choosing a high yield savings account might be a great option, especially if it earns high APY.
It will be best to pick a bank other than your usual one, so you’re not tempted to dip into your emergency money now and then!
Another crucial factor to look for is accessibility. An emergency can happen at any time, so it should be easy to withdraw money from the account using a debit card when you need it the most.
Money Market Accounts
Money market accounts are other types of high-yield savings account, so the advice is just given above still applies.
Look for high interest rates, accessibility, and if possible, store your money at a dedicated bank.
Money market accounts usually have higher fees than traditional savings accounts. Still, they also earn higher APY, so they are worth considering.
Certificates of Deposit
CDs are the third type of savings account. They usually pay high interest but work a little differently than other bank accounts.
CDs hold a fixed amount of money for a fixed period and pay interest after that. They have less liquidity, so that they may be less suitable for emergencies.
Investment Accounts
You could invest your emergency fund, or at least part of it, to earn more on it over time.
After all, if you aren’t gaining something on your account, you may lose money every year due to inflation.
Stocks and bonds, though, can’t be redeemed whenever you want.
They are a less liquid investment than putting your money in a bank account, so I’d suggest keeping part of your money in a traditional account.
That way, you’ll be able to access it at short notice – and you can invest the rest to earn some extra money.
Below you’ll find a list of financial institutions we suggest if you are planning on setting up an emergency fund.
Learn More:
| Bank | Bonus | Expires | Requirements | |
|---|---|---|---|---|
 U.S. Bank Platinum Business MMA |
up to 4.86% APY | October 4, 2023 |
|
Learn More |
 Discover Online Savings Account |
up to $200 | December 14, 2023 |
|
Learn More |
 Western Alliance Bank High Yield Savings Account |
5.25% APY | Limited Time |
|
Learn More |
5 Best Banks for Emergency Funds
The best banks or credit unions where savers should keep emergency funds are the ones that let you access your money easily.
They should also offer higher interest rates and have no early withdrawal penalty.
Here are some banks we recommend based on these criteria:
1. Axos Bank
Axos Bank’s savings account pays a high APY of up to 0.61%.
It has no monthly maintenance fees and no minimum balance requirements.
Axos is insured by the FDIC and compounds interest daily.
Read our full Axos Bank review
2. CitiBank
CitiBank offers 4.35% APY on the Citi® Accelerate Savings Account, has a $1 minimum balance requirement to earn interest, and no minimum opening balance.
On top of the high APY on the savings account, Citi also offers high-yield checking account options.
3. Marcus by Goldman Sachs
Marcus by Goldman Sachs has a high-yield savings account that earns 4.40% APY.
You can open the account starting with any balance, and there are no monthly service fees.
Marcus is FDIC insured, and its accounts are accessible 24/7 thanks to the mobile app. The customer service is available seven days a week.
Read our full Marcus by Goldman Sachs review
4. Discover Bank
DiscoverBank, member FDIC, offers 4.30% APY on its online savings account.
There is no minimum opening deposit required and no monthly fees.
Discover compounds interest daily, but you can expect them to pay it every month.
Read our full Discover Bank review
5. American Express
American Express High Yield Savings Account pays a high-interest rate of 4.30% APY.
There is no minimum balance required to start earning interest and no fees on this savings account.
It’s easy to access this account 24/7 via phone or web portal.
Read our full American Express Savings review
How Much Should I Save in My Emergency Fund?
The amount of money you should have in your emergency fund or emergency savings account depends on your needs and lifestyle.
It should be enough for you to keep your lifestyle and be able to survive several months of expenses without income if necessary.
Some people like to save just the minimum to cover some months’ worth of expenses: pay rent, the bills, food, and so on.
Others prefer to save a little more to have some extra comfort available even in a financial emergency, and never worry.
To calculate the amount you need, you should think about:
- how much savings you already have
- how much debt you have (if any)
- what are your total monthly expenses
- if your line of work has many openings or will be hard to recover from a job loss.
- how long you think you could ever be unemployed for
- what lifestyle you plan on maintaining
These are only some helpful factors to consider, there are many others, and they usually vary from person to person.
How Can I Build Up Savings For an Emergency Fund?
Here are our tips to help you build up your savings account:
1. Build a Bank Account Buffer
Building a bank account buffer is the first step. Regardless of your ultimate saving goals and lifestyle, you should keep at least $500 to $1000 put away in your account as a buffer.
It’s an excellent decision to keep this account buffer even if you are in debt, and your instinct would tell you to use every extra penny to pay off that debt.
Don’t underestimate the power of having even this small amount available for you when you need it.
2. Cut Unnecessary Expenses
Do you have a Netflix account you never use or some other unnecessary subscription? Our advice is to cancel them, right now.
It’s easy to forget about ongoing subscriptions – that’s why they’re such an amazing business model! Money keeps coming out of your account every month – and you don’t even notice.
Do you really need to go to the hairdresser every month? Or that brand new TV when the old one is still perfectly fine?
You get the idea. To quickly build up savings, you should aim to cut costs wherever possible, especially expenses for things you don’t really need.
3. Set a Monthly or Weekly Savings Goal
Calculate a fixed amount you’d like to save based on your needs, and set a time limit for you to reach the amount.
After that, set a smaller goal of how much you want to save each specific week or month, to reach that total over time.
This way, you can turn saving into a game. Plus, as human beings, we are more motivated to do something when we have a goal, which would greatly help our savings mindset.
You could even reward yourself for reaching your goal with a nice dinner out or something else you like to reinforce the behavior.
4. Invest Some Money
Investing a part of your emergency fund is a great way to build up extra cash relatively quickly if you make the right investments.
It would be best not to invest everything you have saved and keep some cash available in a regular bank account.
Investments don’t have the same short-term liquidity as bank accounts at online banks or brick-and-mortar banks.
An investment or brokerage account alone may not be the best choice if your goal is to have immediate access to your funds.
The investment market includes the stock market, bonds, mutual funds, and others so that you can take your pick.
5. Pay Off Your Debt
If you are in debt, chances are you are wasting a lot of money on interest rates every month.
It would be best to pay off your credit card debt, personal loans, car loans, or anything else with an interest rate above 7% as soon as possible.
6. Take Advantage of Direct Deposit
If your employer gives you the option to pay you through direct deposit, arrange with your bank to send part of your paycheck to a dedicated emergency fund.
This way, you won’t have to take a separate action of putting aside money yourself.
They will automatically go to the intended savings account, which is convenient and stops you from being tempted to use your emergency fund for non-emergencies.
7. Save Your Tax Refund
Once a year, if you qualify, you should get a tax refund.
If you expect one, consider asking for the refund to be deposited directly into the emergency fund while filing taxes.
Doing this could be an easy way to boost your savings, and you’d be surprised how much you can end up saving with this simple method year after year.
8. Keep a Change Jar
Whenever you receive some small change back from a store, put it in a jar.
Over time, the jar will fill up, and you’ll have quite some money easily saved up!
Don’t break the jar to use the money when it’s full (no matter how tempting it is), but go to the bank and deposit the money in the emergency fund instead.
9. Earn More Money
Having an extra stream of income coming in is always a great idea.
First of all, it’s always faster to build up money by earning more rather than saving. Second, it can be crucial to have another option if you get laid off or have to leave your main job for personal reasons suddenly.
You can do a part-time job, work overtime, start a passion project, or a side hustle that pays some money. Options are virtually unlimited.
10. Invest Some Money In a Retirement Fund
After you have some money saved up, you can put some in a 401(k) or start a Roth IRA to jump-start your retirement savings.
If your employer matches your 401(k) contributions, as it often happens, you will have even more benefits from opening one.
Both the 401(k) and the Roth IRA are retirement plans. The main difference between the two is how they are taxed.
A Roth IRA has greater tax benefits and is generally a more flexible investment. Still, make sure you take advantage of the 401(k) up to the matching limit first.
11. Build Other Savings Accounts
This step should ideally happen after saving a comfortable amount to face any possible emergency without worrying.
After you have a satisfactory amount in your emergency fund, consider opening separate savings accounts for each goal.
You could have sub-accounts to save money for living expenses like clothing, car maintenance, vacations, or other financial goals you know you want to reach.
Emergency Fund FAQs
Where Do I Put My Emergency Fund?
Emergency funds are usually stored in high-yield savings accounts, money market accounts, or even invested at times.
In this article, you can find a list of the best banks we suggest putting your emergency funds in, which are:
- Axos Bank
- CitiBank
- Marcus, by Goldman Sachs
- Discover Bank
- Bank of America
Is a $1000 Emergency Fund Enough?
Short answer: it depends.
The most common advice is to keep at the very least $500 as an emergency fund, but in most cases, that won’t be enough.
You have to think about paying your monthly bills, keeping your lifestyle, and much more.
What is enough depends on many factors, and you can read all of them in the article above under the section: “How much should I save?”
Should I Keep an Emergency Fund in Cash?
It might be a good idea to do so because emergencies can happen without any warnings. Usually, emergency funds in cash are more readily available.
By this, I mean that the emergency fund, or at least part of it, should be in a bank savings account instead of a volatile investment. Not that you should put money under your pillow – just to be clear!
If you are in doubt, remember it’s always best to talk to financial experts. A financial advisor will be able to help you with your specific personal finance goals.
The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired or changed.
