Why you should have an emergency fund

Imagine this: your car breaks down unexpectedly, your pet needs emergency surgery, or you suddenly lose your job. These scenarios can be stressful and overwhelming, especially if you’re not financially prepared. Only 41% of Americans have at least $1,000 in savings for an emergency.¹ And this lack of savings can cause a lot of stress. Fifty-three percent of Americans who have less than $1,000 in emergency savings rate their emotional health as fair or poor.²

When planning for your future and considering your long-term financial goals it’s important to make sure you’re covered for things that could crop up in the short term. This is where an emergency fund comes in.

What is (and isn’t) an emergency fund?  

An emergency fund is money you set aside to use only for unexpected financial emergencies, such as medical bills or a vehicle repair. It’s your first line of defense against unexpected events — and a key component of your financial strategy.

An emergency fund should be separate from your retirement fund. Your retirement savings are there for one thing: retirement. On average, people spend around 20 years in retirement, which means you need a nest egg that can help you throughout that lengthy period. If you start tapping into your retirement fund now, even in times of emergency, it could leave you short down the road after you’ve stopped working. Not to mention, early withdrawals may come with penalties.

Why do I need an emergency fund? 

Hopefully financial emergencies are infrequent, but they do happen. Emergency funds protect you and your loved ones from the unexpected and having one can help ease stress. Having sufficient emergency savings to pay for unexpected expenses is one of the top four financial concerns among working Americans, with 42% saying they worry about this.³

Prioritizing protection can feel counterintuitive, especially if you have debt to pay off. But what happens if you have a sudden, unexpected event? From job loss to natural disasters, a lot can be out of your control. In this case, there’s a good chance you’ll turn to credit cards or personal loans — and end up accumulating more debt. As a result, this sudden expense may have a much longer impact on your finances.

When you have your emergency fund in place, try not to dip into it for everyday expenses or splurges. Forty-four percent of Americans say they’ve used their emergency fund to keep up with monthly expenses.⁴ If you really do have to spend your emergency funds, make sure to replace them as soon as possible. While you deserve an occasional splurge and eliminating debt is important, building an emergency fund is critical; the good news is with careful budgeting, you’ll be able to do all three. 

How to start an emergency fund today

To start, set your savings goal. A round number like $500 can be a good first step, but after that, some professionals say you should aim to save six months of living expenses, or even one year’s worth of income. Alternatively, use extra income like a tax refund or a bonus to kick off your emergency fund.

Where to put an emergency fund

Keep your emergency fund in a savings account, which can earn interest and is protected by federal insurance up to $250,000. If you have consistent income, consider setting up an automatic deduction from your paycheck into your savings account. If your income is inconsistent, if you’re a freelancer for instance, set aside a certain percentage of everything that comes in. The minimum recommendation is 10% of your income, which can be increased over time as you become more comfortable with paying yourself first. The goal is to get in the habit of saving — and protecting your long-term financial health — so you can be prepared for whatever life may bring.

Taking it further 

Think of your emergency fund as a financial oxygen mask: By putting your own financial protection first, you’ll be able to cover unplanned life events and take better care of those you love. Once you’ve established your emergency fund, the next step is to put layers of protection in place. Whole life insurance, a health savings account (HSA), and a balanced investment portfolio can all help prevent you from going into debt or taking on more debt.

Talk to a professional

Starting an emergency fund and preparing for your financial future can feel intimidating. Consider talking with a financial professional who can help you today. People who work with a financial professional are five times more likely to have emergency savings of $10,000 or more.⁵