Everything You Need To Know About Emergency Funds

An emergency fund is something I believe everyone should have. However, according to a report by Bankrate.com, 26% of Americans have no emergency fund whatsoever for when they need money fast. According to this same report, only 40% of families have enough in savings to cover three months of expenses, with an even lower percentage…

Michelle Schroeder-Gardner

Last Updated: May 25, 2023

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Everything You Need To Know About Emergency FundsAn emergency fund is something I believe everyone should have. However, according to a report by Bankrate.com, 26% of Americans have no emergency fund whatsoever for when they need money fast.

According to this same report, only 40% of families have enough in savings to cover three months of expenses, with an even lower percentage having the usually recommended six months worth of savings.

This is frightening to me, as having an emergency fund can greatly help a person get through tough parts in life.

For us, we have a 12 month emergency fund.

I’ve always been open about this. I am a rather big worrier about things, and having a large emergency fund gives me peace of mind, especially since we are self-employed and our income can vary from month to month.

Even if you aren’t self-employed, there are many other reasons to have a fully-funded emergency fund:

  • An emergency fund can help you if you lose your job. No matter how stable you think your job is, there is always a chance that something could happen where you may need money fast. What would you do if you lost your job and didn’t have an emergency fund?
  • An emergency fund is wise if you do not have great health insurance. This is another reason why we have a well-funded emergency fund. We do not have the greatest health insurance, with our deductible being over $12,000 annually. Having an emergency fund can help protect us if something were to happen to either of us.
  • An emergency fund is a good idea if you have a car. You just never know if it may need a repair.
  • An emergency fund is a need if you own a home. One of the lucky things that homeowners often get to deal with is an unexpected home repair. Having an emergency fund can help you if your basement floods, if a hole in your roof forms, and more.
  • An emergency fund can protect you in many other areas as well. This can include if you have a medical cost for your pet, if you have to take time off work for something, you need to go somewhere far to visit someone who is sick, and so on. The list of reasons for why you might need an emergency fund can be a long one.

Emergency funds are always good to have because they can give you peace of mind if anything costly were to happen in your life. Instead of building onto your stress because of whatever has happened, at least you know you can afford to pay your bills and worry about more important things.

An emergency fund is also wise to have because it can help prevent unnecessary debt. There are too many people out there who count on their credit cards as their emergency fund and that is not a good idea. It can lead to debt spiraling out of control because of high interest rates.

Below is what you need to know about emergency funds for when you need money fast.

 

Should you have an emergency fund if you are in debt?

Yes! I still think you should have an emergency fund even if you have debt. If you have debt, then the usual recommended amount is to have $1,000 in your emergency fund before you start paying down your debt.

After that amount, you need to determine what you are comfortable with.

 

How much should be in an emergency fund?

The next question I often hear is “How much should be in an emergency fund?” How much money you decide to keep in your emergency fund is dependent on your specific situation. If you don’t have debt, then I usually recommend at least six months of expenses.

For us, I like to have one year of expenses saved since we are self-employed, own a house (although that will be changing soon), we have a high deductible health insurance plan, and for a few other reasons. There are many reasons for why a person might need money fast, and you need to analyze your specific situation.

 

Where should you keep an emergency fund?

Your emergency fund is there so that when you need money fast, you can use it. Due to this, you will want to put your money in a place where you can easily take it out. This means you do not want to be penalized for taking the money out and you probably don’t want to invest it in a high risk investment as you don’t want to lose it either.

I prefer keeping an emergency fund in a low risk savings account, such as any basic savings account that you will find at a bank. This way it is easily accessible in case anything were to happen and I needed the money quickly.

You can also save your emergency fund in a CD and/or money market account so that you can earn a little in interest. Keep in mind though that you might earn more in interest because there is a more risk.

 

How can I save enough money to fully fund my emergency fund?

After reading all of the above, I bet you cannot WAIT to start your emergency fund 🙂

It may be hard in the beginning to start saving for your emergency fund, but everyone has to start somewhere and it’s always best to be prepared for when you need money fast. You can save money for your emergency fund by setting out a certain amount out of each paycheck, or you can work towards making extra money so that you can build up your emergency fund even quicker.

Do you have an emergency fund? Why or why not? How much do you keep in it?


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Michelle Schroeder-Gardner

Author: Michelle Schroeder-Gardner

Hey! I’m Michelle Schroeder-Gardner and I am the founder of Making Sense of Cents. I’m passionate about all things personal finance, side hustles, making extra money, and online businesses. I have been featured in major publications such as Forbes, CNBC, Time, and Business Insider. Learn more here.

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  1. Stefanie @ The Broke and Beautiful Life

    I don’t own a home or a car, but I still like to keep a sizable emergency fund- especially with my unpredictable and variable income.

    1. Michelle S.

      Yes, a great reason to still keep an EF.

  2. Tie the Money Knot

    We should really expect the unexpected. Life does not generally go 100% exactly according to plan, for better or worse. In the case of the latter, it’s good to have short-term expenses covered. I really think that 6-12 months is good, particularly if self-employed, or the household is reliant on one primary source of income.

    1. Michelle S.

      Yes, I agree!

  3. Gary @ SuperSavingTips

    We used to have a large emergency fund, but over time it has taken a few hits. What I rarely see talked about is replenishing your EF, which is just as important as establishing one from the start. One of our goals this year is to bulk our EF back up for more security.

    1. Michelle S.

      Good luck with your EF goal 🙂

  4. Michelle S.

    Haha good job!

  5. Kate @ Money Propeller

    Wow, Michelle, you have a great emergency fund! I’m still working on mine, I hope I will have a solid emergency fund too!

  6. Sassy Mamaw

    As a kid, I remember my Dad saying I should have a “rainy day” fund. I had no idea what he meant. For a long time, I thought it meant having money to go shopping or to a movie if it rained! As a young adult, I had a couple of different times where I paid off my debt, but something always came up, because there was no emergency fund. Once I learned about the real purpose of an emergency fund, it seemed an impossible goal. Finally I learned the idea of keeping $1000 back for emergencies while paying off debt. That clicked for me. So here I am, in my mind 50’s, still paying off debt, but now have had the money set back to cash flow several unexpected events, and am intending to save up a “real emergency fund” over the next two to three years. My hub and I are lucky, because we both have good insurance, and short term disability through our work, plus generous severance, if we were to lose our jobs. I hate that I learned this lesson so late, but I’m happy to have finally learned it!

  7. Maureen

    My husband and I have two Emergency Fund. My EF has $40,000 while my husband has a lot more. Not sure when I want to stop! We have no debt but our mortgage that will be paid off within the year.

  8. Kirsten

    I have student loans I’m slowly paying off, and only $200 in savings. I’m trying to cut corners and start putting more in my savings over time now, but I also want to save for a house. Would you recommend that my savings for my house and emergency fund be the same or separate? I just can’t afford to put money into two savings right now 🙁 but I really need to start saving for a house while I’m also trying to save enough back up funds to be self employed one day.

  9. Amanda

    I follow the Dave Ramsey steps and I have a $1000 emergency fund right now. I’ve had to dip into it recently because the snow and ice here in Buffalo, NY has done a number on my exhaust system on my car. But if I use it, I stop paying extra towards my loans (2 more left) and I put the money right back into the savings. When I lost my last job the emergency fund helped out even though I didn’t have to use it. But it was there just incase and I felt safe. Once my loans are paid off, one more year, I will work on having a 6 month emergency fund. Not many people I know have this. Usually, they’ll charge an emergency on credit. Thankfully, I have the funds available so I won’t get into any trouble with credit cards

  10. Hey from MN

    Thanks for the great article! I’m surprised you didn’t mention a HSA for your medical emergency savings. It’s a triple tax break (a deduction for contributions, tax-free growth and tax-free withdrawals.)

  11. Odette

    I don’t have own house and food, light bill it struggles me and personal, I really need emergency fund with no money