How much savings should be in an emergency fund? Tips on how to build one
Rachel Barber, USA TODAY
5 min read
Between car breakdowns, medical emergencies and home repairs, no one is immune to life’s costly curveballs.
Though 60% said they needed to cover an unexpected expense last year, 2 in 5 Americans don’t have an emergency savings fund and couldn’t afford a $1,000 emergency expense, according to a U.S. News survey.
For those without savings, the most popular way to cover an unexpected expense is to use a credit card, according to a Bankrate report. That comes with high interest rates that can make paying it off over time difficult and leave you in a worse position the next time an unexpected expense pops up.
Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making, said people often think they will find a way to work more hours if an emergency arises. She points out, however, that sometimes an emergency like illness or an outside influence like a recession can make that impossible.
“I cannot emphasize enough how important it is to have a buffer stock of savings,” Lusardi said. “I think of a buffer as a shield against shock, so I always tell people: 'Don’t go against shock with no shield. Protect yourself.'”
Financial experts advise having an emergency fund with three to six months' worth of expenses set aside. That can seem daunting to Americans who can’t even afford a $1,000 unexpected expense.
But building an emergency fund is possible. It starts with figuring out where you are and setting a goal. Here’s what to know:
A young woman sits at her kitchen table with her laptop open in front of her with a spreadsheet on it, bills on the counter and a calculator at her fingertips as she tries to budget.
Ensure you've taken care of your financial priorities
Experts agree that most people’s financial priorities are paying their bills and making minimum debt payments on time.
Once you’ve got that covered and are making more than you spend, you can start to pay down toxic debt, like credit card debt, and build a starter emergency fund. Even a few hundred dollars stowed away can help save you from more credit card debt when your washing machine needs repairs.
Next, you should continue building up your emergency fund. If your employer offers a 401(k) match, financial experts advise this is also a good time to take advantage of it to avoid leaving free money on the table.
Set a savings goal
Conventional wisdom suggests having at least three months' worth of expenses set aside, though financial experts are increasingly recommending people have closer to six in a shaky economy and job market.
Take a look at your budget and make a realistic estimate of how much you would need to get by before you could reasonably land another job in case you were fired or laid off. That’s a number you can aim for.
More than half of people who used their emergency savings last year pulled $1,000 or more, including 15% who pulled $5,000 or more, according to the Bankrate report. An additional 22% pulled between $500 and $999 and 18% pulled less than $500.
But Ray Charles "Chuck" Howard, an associate professor of business administration at the University of Virginia, notes that everyone’s circumstances are different, and there is no hard and fast rule.
“If you have great health insurance, and you earn a good salary, and you have access to low-interest debt, you need less of an emergency fund than somebody who doesn’t have those things,” Howard said.
Close up of man with calculator checking bills at home.
Set a budget based around savings
Once you’ve set a goal that makes sense for you, it’s time to save.
Though Lusardi acknowledged that can be difficult if you are one of the many Americans living paycheck to paycheck, she said it’s important to remember it’s not impossible.
“We can adjust our income. We can adjust our expenses. That’s the reality,” Lusardi said. “Let’s not say ‘I cannot and therefore I cannot do it.’ There are many things we can do. The question is: What are our priorities?”
The most obvious yet tiresome advice is to cut back on spending and increase earnings. Tim Rupert, a professor of accounting at Northeastern University, suggested cutting out two coffee runs and saving $10 a week to start. Howard said it’s “easier today than it ever has been” to do some gig work on the weekends.
Experts also suggest taking advantage of one-time savings opportunities, like moving your tax refund into an emergency savings account. Lusardi recommended taking a look at your insurance plans and maybe opting for one that costs less but has a higher deductible.
“People buy insurance with a zero deductible that is super-expensive, and they do that because they know they don’t have any liquidity,” Lusardi said. “Well, it’s better to have some liquidity and not pay this high cost. Having precautionary savings is basically an insurance that we build for ourselves.”
If you do earn enough to save but struggle to avoid spending it, automating savings may be a good option. You can do so by setting up a split deposit with your employer or an automatic transfer from your checking to savings accounts with your bank.
Decide where to store it and when to use it
Emergency funds should be accessible. That means not in a retirement account, the stock market or a risky investment.
Ideally, the experts said, it should be some place safe that is earning interest, like a high-yield savings account. The national average annual percentage yield (APY) for savings accounts right now is 0.59%, according to another Bankrate survey. But some banks offer high-yield accounts with APYs as high as 4% to 5%.
“Just make sure that the bank is insured,” Howard said.
Once you’ve built up your emergency fund, leave it. But when an emergency arises, don’t feel uncomfortable using it. That’s what it is there for. Just remember to replenish it when you get back on your feet.
Reach Rachel Barber at rbarber@usatoday.com and follow her on X @rachelbarber_
