Why should I have an emergency fund?

While surprise expenses are out of your control, how you set up your finances for the future is entirely up to you. A healthy emergency fund can give you the confidence, security, and stability to navigate would-be financial crunches with ease.

Frustrated man looking at car engine

39% of consumers have less than one month’s worth of living expenses in their emergency funds, while 24% have no emergency savings at all.

Why It Matters: While surprise expenses are out of your control, how you set up your finances for the future is entirely up to you. A healthy emergency fund can give you the confidence, security, and stability to navigate would-be financial crunches with ease.

Go Deeper:

Some of the most common emergency expenses include:

  • Paying for car repairs
  • Resolving home repairs
  • Navigating family emergencies
  • Covering medical expenses
  • Experiencing a job loss, layoff, or major dip in business

Then there are the rare yet significant considerations, including natural disasters and global pandemics. For instance, when the world shut down for COVID-19, Americans with substantial emergency savings had one less worry on their hands.

How to build an emergency fund

There are a few ways to start building your emergency fund. You can take the money from a significant one-time payment, such as a tax refund, annual bonus, or inheritance. If you’re unable to free up a lump sum of cash all at once, automatic transfers can be a wonderful alternative.

Set up monthly transfers to go directly into your Eco account or a no-fee, high-yield savings account. It can be all too easy to put emergency savings on the back burner. Automatic transfers ensure your emergency fund will continue to grow, no matter what.

The best savings strategies require little effort on your part and don’t tie up more cash than you can afford. Your emergency money should be both easy to access and stored somewhere that will make your money work for you—for example, augmenting your funds with decent interest rates, points, or rewards. When you let your emergency fund grow on its own, it’s a win-win situation!

One caveat (and a nice problem to have): don’t go overboard with your emergency savings. If you find yourself with more than a year’s worth of savings, consider using the excess funds for retirement contributions or other investments with longer-term horizons. Even if you can secure decent interest rates, storing too much cash actually makes you lose money due to inflation and missing out on the power of compounding growth.

How much should you save?

You’re probably wondering how much money should be in that emergency fund. Is $1,000 enough? Probably not. Just start from where you are. Sometimes even a teeny stash of emergency savings can save you the stress of credit card debt and relying on family and friends.

Generally, financial experts recommend you save enough money to cover three to six months of expenses. Although some will suggest you save up to a year’s worth of living expenses. Depending on your personal circumstances, it can definitely be a case of easier said than done. A high earner living within their means can cut back on nonessential purchases to quickly put that money aside. But if you’re not a high earner or if you live paycheck to paycheck like 63% of Americans (high earners included!), take baby steps instead. Every little action will take you closer to your goals.

Emergency fund vs. paying debt vs. retirement money

Let’s say you’re ready to start saving, but you have to pay off debt with high interest and you have retirement savings to consider. You might want to speak to a financial advisor for personalized recommendations. Financial experts often recommend you build your emergency fund before tackling retirement, but they might alter that advice depending on your age and overall financial snapshot.

High-interest debt can quickly eat away at your income. Always keep up with payments, but try to squirrel away extra cash to go towards your rainy day fund. That can help you break the cycle of turning to loans and credit cards to resolve financial surprises.

Be realistic about your habits

At the end of the day, it comes down to knowing your money habits. If you think you might use building an emergency fund to procrastinate on your retirement savings, come up with a system. For instance, for every $1,000 saved for emergencies, you’ll increase your retirement contribution by X%. Or after you have one month of emergency savings in your account, you can get back to retirement contributions and put away a smaller amount to your emergency fund every time you get paid.

Life can be full of surprises—inconveniences included. Build a rainy day fund to minimize the risk of future financial hardship. It can be just the cushion you need to navigate life’s surprises with confidence and ease.


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