Why Do You Need an Emergency Fund?

For instance, a good starting point is to understand how much you spend on essential living expenses. Think about your rent or mortgage, loan payments, average utilities, average grocery bills, and any other essential expenses each month.

You’ll also want to think about your job — in particular, how you earn income. Someone who is self-employed or works on commission may need to consider building an emergency fund that can cover more than six months of living expenses in case work slows down for a while.

On the other hand, someone who is in a stable job with professional skills that are in high demand (in other words, can easily find another job) may not necessarily have to save more than six months of expenses, especially if their income is more predictable and they have a greater sense of job security.

Whether you need a larger or smaller cash reserve, building an emergency fund can be accomplished through patience, discipline, and consistency.

How do you build an emergency fund?

If you’re just starting out, know that 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. If you need help identifying areas to trim, consider using a budgeting app to analyze your spending.

Are there discretionary expenses that you could cut back or eliminate? Some apps can help you cancel unwanted subscription accounts. Any extra money you’re able to save can be reallocated toward your emergency fund.

Other ways you could prioritize your emergency fund goals include:

• Scheduling automatic transfers to your savings account every time you get paid.
• Saving your tax refund or bonuses from work.

Where should you put your emergency fund?

It’s a good idea to keep it separate from your regular savings or checking accounts because you don't want to mix up your day-to-day money with the funds you’re setting aside for emergencies. Having a dedicated savings account for your emergency fund can also help you easily track your progress toward your savings goal.

Keeping your emergency fund in a high-yield savings account can be a great option, as you would be able to earn interest and still have access to your money when you need it.

You may also want to look into a no-penalty CD account where you could earn a competitive rate and have the flexibility to withdraw your funds without an early withdrawal penalty. Just remember that with no-penalty CDs, once you open an account and make a deposit, you can’t continuously add money to it.