Emergency Fund: What It Is And How To Build One

Every month you diligently pay off your credit card bills, student loans, and make sure to get that rent check in the mail on time. And that’s wonderful, but, is it enough?

If you’ve got nothing saved for an emergency, the answer is no, it’s not. Millions of Americans are living on the edge when it comes to emergency finances. A broken bone here, a leaking roof there, and a car exhaust system that just gave out is enough to send some people into financial ruin. Here’s how to ensure you’re not one of them.

What Is An Emergency Fund?

As the name implies, an emergency fund is money set aside to help you with a financial jam if something unexpected were to occur. An emergency fund is meant to help you plan for the unexpected and avoid the financial stresses that seem to accompany so many of life's stresses.  

What Are Emergency Funds For? 

There are so many surprises life can throw your way and the costs can vary from one surprise to the next, ranging from a job loss or medical emergency to home repair or car problem. 

"Figuring out how much you need in an emergency fund starts by understanding how much you spend on a regular basis."

Few of us ever expect to get laid off or fired, but job loss happens. Fewer still know that an unfortunate medical diagnosis could be around the corner, waiting for you or someone you love.    Unexpected expenses can quickly turn into unexpected debt that can hurt your financial health.

Why Do You Need An Emergency Fund? 

If it's not clear already, an emergency fund could be a powerful safety net that offers you a little peace of mind when you need it most, and a little more control in an otherwise uncontrollable situation.  

Emergencies are unavoidable. And by definition, they're hard to anticipate. But having an account with funds set aside for emergencies will let you shift focus where it needs to be – to yourself or a loved one.

But what if you're already in control of your finances, you may ask? Well, having extra money set aside as a safety net is never a bad thing. Just make sure your extra cash is easily accessible and safe. You may have your finances in check, but conventional wisdom says if your emergency cash is invested in the market, it may be more time consuming and risky to withdraw your money. And most would agree that time is what matters most when the unexpected happens. Having a Marcus high-yield Online Savings Account is a great option as you can withdraw your funds easily and you can let your money earn high interest while it stays in your account.  

Who Needs An Emergency Fund? 

The short answer – everyone.

All people can benefit from an emergency fund. But certain people may be susceptible to unexpected financial setbacks. They may seem obvious, but here are a few factors that could lead to having to access an emergency fund: 

  • Home owners and car owners – If you own a home or a car then having an emergency fund is crucial. Think of your safety net as a pocket of money for you to dip into if unexpected repairs or maintenance pop up.
  • Freelance workers, contractors or anyone self-employed – Work opportunities can ebb and flow  and regular paychecks may be hard to come by, so having an emergency fund can help ease some of the stress of a potentially volatile work life or job loss. 
  • Prone to getting sick – Going into unmanageable debt because of frequent medical bills or medical insurance shortfalls is never in anyone's plan. So having access to an emergency medical fund can only help protect you.

Where Do You Want to Keep Your Emergency Fund? 

So where should your emergency fund live? Your best bet is to keep it separate from your regular savings or checking bank accounts. Conventional wisdom says you don't want to mix up the funds you regularly use with funds you need for your safety net. But you still need ready and quick access to your emergency fund when you need it.

"A well-stocked emergency fund can be the difference between going into debt, or being able to forget the whole thing ever happened."

An FDIC-insured, Marcus high-yield Online Savings Account can be a great option as you’ll earn high interest and be able to quickly access your cash.  Many offer competitive rates and don’t have minimum balance requirements.

A Marcus No-Penalty CD is another option because you could earn a higher interest rate than a savings or money market account. But unlike traditional CDs, like the Marcus high-yield CD, you won’t be faced with an early withdrawal penalty after a certain period. But, with all financial products you open, check the fine print so you understand what you’re getting into.

How Much Do You Need In Your Emergency Fund? 

Many agree you should have three to six months’ worth of living expenses set aside for your emergency fund, but this really depends on your situation. You might need more, or you might need less. 

Figuring out how much you need in an emergency fund starts by understanding how much you spend on a regular basis.

To be clear, we’re talking about the essential living expenses — not all the extra nice-to-haves. Think about that rent or mortgage payment, existing loan payments, average utilities, average grocery bills, and any other necessary expenses each month. In an emergency all those extras like gym memberships, streaming movie accounts, and the beer of the month club should go.

You’ll also want to consider how you earn income. A freelancer or someone who works on commission may need to consider having more than six months’ worth of expenses in case work dries up or is slow for several months in a row. Someone with a job in a highly desirable profession (aka can easily find another job) may not need as much, especially if their expenses are much lower than their salary.

A simple way to calculate what you might need is to work out your bare bones budget, while also adding on any anticipated expenses, like replacing your HVAC or a car tune-up.

If you need less, that’s great. Saving for it may not seem so intimidating.

If it’s more, don’t freak out. Building a sizeable emergency fund isn’t as impossible as it sounds.

How Do You Build An Emergency Fund? 

Every little bit helps when you're trying to reach any kind of savings goal. 

To start, see if there’s any wiggle room in your budget. Even cutting back $25 a month is better than nothing. Apps like Clarity Money can help you analyze your spending and help you cancel unwanted subscription accounts which will help you reach your savings goal. All those extra funds can be reallocated toward your emergency fund.

There are other simple ways to create an emergency fund, like setting up automatic transfers every time you get paid, setting aside your tax refund or bonuses from work can all help you grow your account.

When Should I Use My Emergency Fund? 

One indication that it’s time to use an emergency fund is when you have an unexpected expense and the only way you could cover it would be to go into considerable debt. 

The range of emergencies can span everything from the imaginable to the not-so-imaginable.  So it only makes sense to fight the urge to use your emergency fund for predictable events or reoccurring payments (easier said than done, we know). But just remember that an emergency fund is there to help relieve stress at an already stressful time in your life. When those stressors come, you’ll be thankful.

Are You Among the Millions Who Can’t Cover an Emergency? 

According to a 2016 report from the FINRA Investor Education Foundation, 38 percent of Americans spent almost equal to their income and 18 percent spend more than their income. That means they are making it through the month, but hardly.

What’s more, a 2017 report released by the U.S. Federal Reserve found that only 59 percent of families could easily cover a $400 unexpected expenses without having to sell their belongings or borrow money from their family or friends.

This lack of emergency savings is leaving people wide open for financial trouble. That’s why an emergency fund is not only necessary, but crucial for good financial health.

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.