How far would your emergency savings go if you had a sudden job loss or a medical event that kept you away from work?
Our 2022 Workforce Financial Well-Being Report finds that 64 percent of American workers have less than three months of cash savings available to them. Even scarier: 12 percent have just less than one week’s worth.
To build your emergency fund to a sufficient level, you need to save money on a regular basis. This may require setting a budget, reducing your expenses, or finding ways to increase your income.
Follow the steps we’ve outlined to better prepare yourself to handle unexpected financial challenges.
What is emergency savings?
Emergency savings are a designated fund to help you save for expenses that are unexpected, urgent, and essential. These emergencies can include unexpected expenses, such as medical bills, car repair costs, or income loss due to recent unemployment.
The purpose of an emergency fund is to provide a financial cushion to help you weather these kinds of unforeseen financial challenges without having to turn to high-interest debt options like credit cards or unsecured loans.
Having emergency savings is an important part of financial planning and can help you to be better prepared to handle unexpected financial challenges. Certified Financial Planners recommend saving enough money to cover at least three to six months’ worth of essential expenses, such as housing, food, and utilities.
Saving for emergencies is also the number one contributor to better financial well-being, according to the Consumer Financial Protection Bureau. Those critical savings lower mental anxiety that stems from unexpected events and can provide better peace of mind.
What’s the difference between an emergency fund vs savings
The main difference between an emergency fund and a generic savings account is the purpose for which the money is saved. An emergency fund is meant to be used for unexpected expenses or financial emergencies, while a savings account is more broadly used for longer-term financial goals.
A savings account is a financial product that could be used to save money for things like a down payment on a home. Savings accounts generally offer higher interest rates than checking accounts, as well as lower interest rates than other types of investment accounts like Certificates of Deposits, Money Market Accounts, or IRAs, but they also offer a higher level of security and liquidity.
In other words, you can build an emergency fund using a savings account, but we recommend having both an emergency fund-specific savings account and a separate savings account. This personal finance approach can supply you with a financial cushion in case of an emergency while enabling you to achieve your other longer-term financial goals.
Why is it important to have an emergency fund?
It is important to have emergency savings for several reasons:
- To avoid going into debt: If your car breaks down or a medical emergency occurs, turning to high-interest credit cards or loans are more expensive and more difficult to pay over the long-term. There’s a high likelihood that you’ll end up with more debt.
- To protect against a loss of income: A job loss or reduction in hours can result in a temporary loss of income. Without emergency savings, you may have difficulty paying your bills and essential living expenses, like rent and utilities.
- To reduce financial stress: Unexpected financial challenges can be stressful and overwhelming. Emergency savings are meant to offer a sense of financial security and help reduce mental and emotional stress.
How much should you have in emergency savings?
Finance professionals generally recommended to have enough emergency savings to cover at least three to six months’ worth of essential expenses, such as housing, food, and utilities.
But those emergency fund amounts can seem daunting to build for most Americas, who may lack $400 on hand.
The final amount in emergency savings is based on variable factors like income, employment status, fixed expenses, debts, lifestyle, and family status.
How many months of emergency savings is enough? Consider these main factors:
It starts with saving immediately, no matter how little
Start small. Performing the act of saving itself is a significant first step. Don’t be discouraged by the grander idea of saving for three to six months, which could be $10,000 to $20,000 (a very large and intimidating amount). Even if you save $5 per paycheck, starting small is better than not saving at all.
From there, you can push yourself to achieve higher milestones, such as $400, $1,000, and $2,000, all of which represent thresholds for varying levels of emergencies. At Sunny Day Fund, our emergency fund goal start is a stretch (or ideal) goal of $2,000, which you can then adjust upwards as you reach that milestone.
It depends on your current financial health
The specific amount you should have in emergency savings will depend on your individual financial situation. Factors to consider when figuring out how much to save include your income and level of financial stability.
For example, if you’re a contractor or a gig worker, you may have more unstable income. You may need to have more saved away to overcome potential income droughts.
There’s also your current lifestyle to consider: do you want to keep the current level of comforts and luxuries that you can afford, currently, with your regular income? In a hypothetical world where that income disappears, will you forego your current lifestyle, or will you try to keep it consistent? If the latter, then consider increasing the amount that you put toward your emergency fund.
It should consider your other financial goals
Building emergency savings needs to support the other financial goals that you or your family may have. In an ideal world, you’re not forced to stop saving for other things, or to stop paying down debt in order to contribute to your emergency fund.
It’s also important to consider your financial goals and priorities when figuring out how much to save. For example, if you’re paying off debt or saving for a down payment on a home, you may need to save less for an emergency fund in the short-term.
However, it’s still important to have at least some emergency savings in case of unexpected expenses.
It comes down to your essential expenses
Ultimately, to decide how much money is the right amount to have saved in emergency savings, you need to calculate your monthly essential expenses. This should include rent or mortgage payments, utilities, food, and transportation. It might also include expenses necessary to support your basic needs, such as healthcare and insurance premiums.
Once you have an estimate of your monthly essential expenses, multiply this amount by the number of months of coverage you want to have in your emergency fund. For example, if you want to have three months’ worth of coverage and your essential expenses are $2,000 per month, you should aim to save $6,000 in your emergency fund.
This is a general guideline but having enough to cover your expenses ensures you’re not overextending your finances when an emergency happens.
It’s better to have more than less
The more money you have in an emergency fund, the more prepared you are to handle paying for sudden emergencies.
In our Financial Wellbeing Survey, we learned that 55 percent of respondents would be unable to pay for an unexpected $400 expense from their checking or savings account (where most people typically save for emergencies). With larger financial emergencies – perhaps a broken water heater that costs over $2,000 – even fewer could afford to tap their checking or savings accounts.
Where to invest your emergency fund?
When choosing a place to keep your emergency fund, it’s important to consider the safety and accessibility of the account. Get an account that is FDIC-insured or NCUA-insured to protect your money in case the financial institution fails.
You also want to choose an account that is easily accessible in case you need to withdraw money in an emergency. Make sure that your emergency fund is in liquid assets (i.e., cash, checking, or savings) so that you can easily access your money in times of need.
Aim for high-interest or high-yield savings accounts
Choose a savings account or other type of cash account rather than a riskier investment, such as stocks, crypto, or mutual funds, and shop around for high-interest savings accounts with no fees or required minimums.
If you want to look beyond a traditional checking or savings account as your emergency fund, consider some other options:
- Online-only bank account: Online-only banks offer both checking and savings options. What makes them a good choice is that they generally offer higher interest rates than traditional banks and charge no maintenance fees to keep a balance. If/when you need cash, these banks usually have a wider network of ATMs (and charge no fees) compared to traditional banks.
- Credit union account: Credit unions are nonprofit financial institutions that are owned and controlled by their members. They often offer higher interest rates on savings accounts and, generally, have lower fees than regular banks.
- High-yield savings account: A high-yield savings account is a type of savings account that offers a higher interest rate than a traditional savings account. This can help your money grow faster and supply a bit of extra income. High-yield savings accounts are typically FDIC-insured, which means your money is backed by the government up to $250,000.
- Money market account (MMA): A money market account is like a savings account but typically offers higher interest rates and check-writing capabilities. Generally, MMAs have fewer restrictions than high-yield savings accounts.
Do you already have an emergency savings account? Use this FDIC resource to see how that account’s interest rate stacks up against the averages and the maximums offered by
Enroll in workplace emergency savings
Similar to an employer-supported retirement plan or healthcare savings plan, some companies offer emergency savings plans as a benefit to help employees save for a range of expenses. Workplace emergency savings provided by employers is now a top financial consideration when people evaluate whether to join a company.
If your company has an employer-sponsored emergency savings plan, then we recommend you enroll. In the future, you may even be able to receive a tax benefit on the gains in that emergency fund.
At Sunny Day Fund, we’re passionate about helping more companies support their employees’ financial well-being. In today’s world, this means saving not just for the distant future, but for whenever funds are needed.
We also care deeply about those employees – who we call “Savers” – and make sure we deliver highly competitive interest rates that go up alongside the Federal Reserve’s increase in rates. Currently, this rate is 2.12% percent – almost seven times the national average savings interest rate.
If your employer allows you to save for emergencies through Sunny Day Fund, your emergency savings are saved as liquid assets and are at once accessible for no-penalty withdrawals.
Our emergency savings plan comes with employer-sponsored rewards, which boost the amount you save over time. Try out our free calculator to see how using Sunny Day Fund will increase your total emergency savings over time, compared to going the journey alone.
How to save for your emergency fund?
It may seem daunting at first but there are strategies you can use to make saving for emergencies easier and more rewarding. Once you put systems in place, you may not even have to think about saving.
1. Set a goal
Decide how much you need to save to reach your emergency fund goal. Remember: it’s recommended to have enough emergency savings to cover at least three to six months’ worth of essential expenses. But, again, the goal amount you have saved in your emergency fund depends on a lot of factors that are unique to your situation.
2. Start small at once
Yes, setting a goal of three to six months of savings is the ideal, but it’s okay to start small and gradually build your emergency fund over time. Building your emergency savings might become easier to achieve if you start saving at once – with the idea that doing so can help to start molding a new mindset or behavior towards saving.
First, set an immediate low-amount goal to put into your emergency savings, like $400. Then, work your way up to $2,000 (this is our recommended minimum). After reaching this goal, the next plan is to work up to a long-term goal of three months. Then, plan for an even longer six-month period, or even one year.
Work with a financial coach and use various online tools to understand what these longer, bigger targets can be.
Rather than fixating on how much you need to save in the long run, focus on what you can do today to get yourself one step closer to financial security. Building on small wins is crucial to staying on track to achieving better financial well-being.
3. Make a budget
Make a budget to track your savings and expenses over time. This will allow you to get a clearer understanding of your financial situation and enable you to make more informed decisions about how much you can realistically save each month. Creating a budget also gives you the opportunity to iterate on improvements to your spending or savings, adjust your goals, and find minor issues before they become major problems.
There are several ways to create a budget and track your finances, from a financial advisor or counselor to free or paid apps. These can help you get a clearer understanding of your financial situation, allowing you to make more informed decisions.
4. Cut costs
Use your budget as an auditing tool to decide where you can cut costs and reduce your expenses.
If you take a mindful approach to your spending, you’re more likely to find ways to cut unnecessary expenses. You might be surprised to learn how much you spend on things like an occasional coffee on the way to work, or a membership or subscription you rarely use.
Some helpful questions to ask yourself when looking at what to cut or reduce:
- What’s necessary (absolutely need it to survive) versus unnecessary (it’s a nice-to-have)?
- Is there an alternative, cheaper product or service that can replace something you currently pay for? Are you able to find discounts?
- Are there bills that can be negotiated so that you’re paying less? For example, can you negotiate a special, lower rate with your internet provider? Can you double-check your bill with your medical service provider?
Some financial planners suggest looking for ways to reduce expenses by canceling subscriptions you no longer need, buying groceries not at convenience stores, reducing your driving habits by carpooling or using public transportation, or shopping around for a more affordable cell phone plan.
5. Automate your savings
A simple way to save consistently into your emergency fund is to put your savings on autopilot. You can set up a monthly direct deposit from your checking account to your emergency savings fund, making it impossible to forget to save. There are three main ways to automate these savings:
- Automatic transfer each payday through your employer: You can work with your employer directly (via HR, people ops, or whoever oversees your employee benefits) to make sure that a direct deposit is made into your desired checking or savings account every pay period. You select the dollar amount or percentage that goes into the account that you’ve earmarked for emergency savings.
- Automatic transfer each payday through your bank: You can work with your bank directly to set up automatic deposits. It works similarly, except the money comes out of your already-existing bank accounts. Each payday, the bank or credit union transfers a designated amount from one of your existing accounts to the savings or investment account you’ve chosen as your emergency fund.
- Automatic transfer on your chosen day/interval through your bank: It works much like auto transfers for paydays, but instead you focus on contributing just once a month (like the 21st of each month) or on your own set interval (e.g., every two weeks). This works great especially in cases when you know you’ve got bills more often towards the first or last days of the month and can help you better manage your cash flow.
In many cases, employers can also split your paycheck into multiple accounts, so you may be able to have a part of your pay deposited directly into your emergency fund on top of your regular savings and checking accounts. If you have employer-supported emergency savings like Sunny Day Fund, your employer can even opt to match a part of your contributions.
“A habit I love using is gamifying your savings method through something like a color-in tracker,” said I Like to Dabble’s Daniella Flores. “Set up your auto-saving into the emergency fund with your bank (or wherever you decide to put your emergency fund) and set to transfer a certain amount every week, every paycheck, or every month. Whatever feels comfortable. Then set a threshold for when you meet x amount, for the money to go into other saving buckets or accounts at your bank like a travel fund, house fund, etc. On the days your auto transfer is set to go, get your color-in tracker out and update it (so many fun ones available on Etsy but I have one here).”
You can also use our Sunny Day Fund app to track and celebrate your progress in a similar way.
6. Consider additional sources of income
One sure way to increase the overall cash flow is to add more sources of income. Do you have the bandwidth to take on a part-time or contract job (without it negatively affecting your mental and emotional health)? Consider opportunities to earn more income by starting a side hustle, taking surveys, or working toward a promotion with a higher income.
And don’t forget to ask for a raise! It may not be immediate, but most employers in this broader labor environment are eager to keep their existing employees.
One-time earnings boosts – like your tax refund or annual bonus – might be put to better use if a portion goes towards your emergency savings. If that money isn’t helping you to pay off any sitting bills or expenses, then consider putting some of those dollars into your emergency fund. You can also sell things you no longer need: clean out your closet or hold a yard sale.
7. Develop a habit (and mindset) of saving
Our top emergency savings tip is to contribute something every paycheck. Even a small amount of savings is better than nothing, and once you get out of the habit of putting something away, it may be hard to get back on track.
Consult a financial coach – you may have access to one via your employer or a community program or non-profit. This is often the best place to start because a financial coach will help you understand your whole financial picture. They could also potentially help you with re-visiting debt payments. Working with a coach can provide the initial support you need to help shift your mindset toward long-term savings.
Put a plan in place to hold yourself to your goals. Ask a friend or family member to be an accountability partner, and check in with one another on a regular basis to ensure you’re doing what’s necessary to build your emergency savings and improve your financial well-being.
When to use your emergency fund?
The money in an emergency fund should be used only for unexpected expenses or financial emergencies. An emergency fund should not be used for non-emergency expenses, such as vacations or luxury items.
As a guideline, use your emergency fund to pay off debt and expenses related to:
- Job loss: If you lose your job, you can use your emergency funds to cover your essential expenses until you find a new job or until you receive unemployment benefits.
- Medical emergencies: If you or a family member has a medical emergency, your emergency savings can help to cover the costs of medical treatment and related expenses.
- Car repairs: If your car breaks down and you need to make costly repairs, you can use your emergency savings to cover the cost.
- Home repairs: If you need to make unexpected repairs to your home, such as fixing a leaking roof or broken water heater, you can use your funds to cover the cost. You might also use it to cover the cost of temporary housing, if necessary.
Not all situations call for a dip into your emergency fund. Ask yourself whether using your use of emergency savings is essential in each instance or merely convenient.
When to withdraw from your 401(k)?
The purpose of setting up emergency savings is to reduce and even prevent you from having to dip into your retirement savings like a 401(k) account.
It’s generally not recommended to withdraw from your 401(k) account. 401(k) accounts are intended for long-term saving for retirement, and withdrawing from your account can have significant consequences, including:
- Taxes and penalties: If you withdraw money from your 401(k) before you reach age 59 1/2, you are subject to taxes and a 10 percent early withdrawal penalty on the amount you withdraw.
- Loss of potential growth: By withdrawing money from your 401(k), you lose out on the potential growth that the money could have earned if it had stayed invested.
- Reduction in retirement savings: Withdrawing from your 401(k) can significantly reduce your retirement savings, which makes it more difficult to achieve your retirement goals.
If you do need to take a loan or withdraw from your 401(k) for an emergency, it’s important to carefully consider the potential consequences and explore other options, such as completely withdrawing your emergency savings and potentially other savings first.
If you do decide to withdraw from your 401(k), make sure to only take out the amount that you absolutely need and to replace the money as soon as possible to minimize the impact on your retirement savings.
How to get money in an emergency
If you find yourself needing money in an emergency, there are other alternatives to help you get money in an emergency:
- Take out a loan: If you have good credit, you may be able to get a personal loan from a bank or online lender. Personal loans can be used for a variety of purposes, including covering emergency expenses.
- Use a credit card: If you have a credit card, you may be able to use it to cover emergency expenses. Just remember that you need to pay back whatever you charge on the card, plus interest.
- Ask for help: If you don’t have emergency savings to help you cover your unexpected expenses on your own, you may need to ask friends or family members for financial assistance.
- Sell something: If you have assets that you can sell, like jewelry or electronics, you may be able to use the proceeds to cover your emergency costs.
Compare your options. We recommend avoiding any option that may result in additional fees or added interest, as they have the potential to leave you with more debt. Also, keep an eye out for loan scams from predatory lenders.
Emergency savings create a pathway to financial well-being
You can’t put a price on peace of mind. If your current emergency plan relies on tapping into credit cards or making early withdrawals from a 401k, it’s time to start building your savings.
By setting up an emergency savings account today and contributing to it regularly, you can avoid taking on unnecessary debt or paying high interest and fees.
Remember, you don’t have to completely change your lifestyle to achieve your savings goals. If you can find a way to set aside $20 per week, you could save over $1,000 in one year.