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What You Need to Know About Emergency Savings Funds

Updated: Sep 19, 2022

As many people recently experienced in the early days of the pandemic, your entire financial situation can change very suddenly with little to no warning. But even before the coronavirus pandemic disrupted everything, many people struggled to cover emergency expenses, with one study from 2019 finding that about 40% of Americans would struggle to come up with $400 to cover an unexpected expense.

Emergency Savings Funds

One of the most significant financial goals people are encouraged to focus on is building up an emergency savings account. People are well aware of the need to have an emergency savings account. The problem is that building one up is often easier said than done.

When people have immediate financial needs to deal with, like rent/mortgage payments, groceries, and paying down existing debt – and aren’t left with much after handling those essentials – saving money for a hypothetical, down-the-line event is an easy thing to put on the back burner.

But not having money set aside for a rainy day can lead to other problems. Not only does this make it difficult to cover sudden expenses, trying to cover those expenses may come with hidden costs. As Genisys Credit Union notes, when people need to come up with the money to cover an emergency expense, they often tend to turn to solutions that are expensive in the long run, such as taking out payday loans or putting things on high-interest credit cards.

Or if they have money invested, they might try to withdraw money from those accounts, which can come with penalties for withdrawing funds early. There are also domino effect problems that can occur, such as having to delay expensive repairs for persistent car problems, only to end up losing a job because those persistent car problems made you late for work too many times.

Circumstances in recent years have shown that a lot of common advice about emergency savings just isn’t working out anymore. Very often, people end up feeling like having an emergency savings fund is a goal that is completely unattainable. So what do you need to know about them now?

How Much Should You Save for Emergencies?

The most widespread rule of thumb about emergency savings is that you should save enough to cover your expenses for three to six months. But that’s a pretty big range, and in some cases, it can even be advisable to save even more money than that. So how much do you really need to save?

The simple fact of the matter is that everyone has unique financial needs and that plays a role in how much you should put in your emergency fund. For example, if you don’t have a lot of debt, you have a stable job, don’t have any dependents, and your cost of living is fairly low, the lower end of that spectrum could be the goal to focus on.

But on the other hand, if you have children, your spouse is a stay-at-home parent, you live somewhere with a high cost of living, think it would take a while to find a new job if you lost your current one, or have a health problem that could result in medical expenses or time away from work, it would be better to save for six months of expenses.

If you have a very specialized job, might have to relocate to get a new job if you were to suddenly become unemployed, are getting close to retirement, or generally have a high income, it’s good to aim to save a year’s worth of expenses.

How to Start Saving for Emergencies

How much you should put into your emergency savings each month largely depends on your unique financial situation. If you’re just starting to save, or even if you already have an emergency savings established but your financial situation has changed, take a look at your overall monthly budget and figure out how much you can reasonably afford to save.

Start by figuring out how much all of your essential monthly expenses total each month, then multiply that by how many months you need to save for. That will give you your total savings goal. Once you know how much you spend on essentials each month, you can start to figure out how much you can afford to save.

One common question people have about building up an emergency savings account is whether paying down debt should be prioritized over saving for emergencies. The ideal solution is to find a balance where you’re adding to your emergency savings while paying down debt at the same time.

Given how quickly interest can add up, paying off high-interest debt should be a priority. But even if you aren’t able to save much each month for a rainy day, setting aside anything is better than saving nothing. Small amounts still add up over time and it keeps you in the habit of regularly saving.

Where to Put Your Emergency Savings

Your emergency savings should be kept separate from your checking and regular savings accounts, but remember that some savings account options can have restrictions about accessing your money.

High-yield savings accounts are great for emergency savings accounts because they generate extra interest while still keeping it easy to access when you need it. If you’re concerned about being tempted to tap into your emergency savings for non-emergency purposes, these accounts often have limits on how often withdrawals can be made.

Money market accounts can be another option to consider since they also generate extra interest and it’s easy to access your funds when you need them. However, they may have higher minimum balance requirements than a high-interest savings account and may have fees attached.

Certificates of Deposit (CDs) can also work for emergency savings funds but require some careful planning. CDs can have early withdrawal penalties if an emergency comes up before the CD reaches maturity and accessing those funds isn’t as simple as it is with a high-yield savings or money market account.

Very often, people who use CDs for their emergency savings “ladder” their CDs, which means their money is split between multiple CDs with different maturity dates. That way, some amount of money is accessible at varying intervals without impacting your interest on all of the money being saved.

Best of luck reaching all your financial goals!

Author Bio: Angela is a freelance writer based in the Detroit area. She writes about a wide range of topics, ranging from film to design and small businesses. When not writing, she enjoys hiking, gardening, and antiquing.

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