How to establish an emergency savings fund

Posted 2023-05-17 20:13:55

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Establishing an emergency savings fund now can have a big payoff later. Setting aside emergency savings can help you get by if your home or car needs urgent repairs, as well as in more serious situations such as illness or unemployment. Here’s how to figure out how much you need and how to get started.

Your emergency savings fund should be enough to cover your major expenses for six to nine months. If that seems daunting, you can always start by targeting three months of expenses and build from there. Here are some important expenses to consider when determining how much to save:

Housing expenses: Your emergency fund should include savings for housing expenses such as rent or mortgage, property taxes, insurance and utilities. Protecting the value and integrity of your home is of utmost importance, so it’s a good idea to also include savings for emergency home repairs.
Food: Estimate your monthly food expenses and include those costs in your emergency fund savings. Save money on food by reducing your food expenses—cut back on dining out, build your shopping list around sale items, and use coupons—then apply those savings to your emergency fund.
Insurance: Factor in the monthly cost for medical and dental insurance. Remember, if you’re laid off, you may be eligible to stay on your former employer’s health plan for a period of time at your own expense through COBRA—the Consolidated Omnibus Budget Reconciliation Act. You’ll also want to factor in the cost of any disability or life insurance policies you may have.
Debt repayment: Plan for payments on credit cards and other debt in order to protect your credit score. Try to take steps now to get out of debt to avoid the stress of dealing with these expenses if you become unemployed or face a financial challenge.
Transportation: If you have a vehicle, your emergency savings should cover necessary costs such as your car loan, auto insurance, basic maintenance, fuel and emergency repairs.
Personal expenses: Costs related to household supplies, haircuts, clothes and toiletries may seem generally inexpensive but can add up. Remember to include those items when figuring out how much to save for an emergency fund.

Once you know what your emergency fund should cover, the next step is to set up a savings plan to build toward your goal. An easy way to get started is to put any big payments, such as a tax refund or holiday bonus, away as savings. From there, work on a specific monthly savings goal and devote a percentage of every paycheck to savings. It’s a good idea to pay yourself first by establishing automatic transfers into a designated savings account. Automatic savings can go a long way to ensuring strong and steady growth of your emergency fund.

Once you’ve committed to monthly savings, consider the options for where to put your emergency fund:

Regular savings account: A regular savings account allows you to access your money whenever you want. A basic savings account is a good choice if you’re just starting to save and want to be prepared for unexpected expenses.
Money market account: Money market accounts are a good option if you want higher interest rates as your balance grows, while still maintaining easy access to your funds. These accounts tend to offer a better return than a regular savings account, but may require a higher minimum balance to avoid fees.

Whichever savings account or method you choose, make sure you can access your emergency savings fund when you need it so you’re prepared for the unexpected.

The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options. Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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