Saving for Emergencies

Updated May 4, 2020 . AmFam Team

Considering setting up an emergency fund for unexpected life events? Learn how to build an emergency fund to help keep you on track and headed toward your financial goals.

An emergency fund usually consists of a savings account that’s put aside to help pay for unexpected financial surprises. Because life can throw you a curve ball every once in a while, emergency funds are key to help you continue forward — toward your financial goals.

But do you know how much emergency money you need? We’ve got some great tips to help you calculate emergency funds based on your income, budget and long-term financial objectives.

The goal of an emergency fund is to give you access to the money you need to move through an emergency or unexpected expense with ease. It not only helps relieve the financial burden, but you’ll find real peace of mind too once it’s set up. An emergency fund is a great layer of financial protection for what matters most in your life, especially during uncertain times.

How Much Money Should Be in an Emergency Fund?

In most cases, emergency funds should pay for every expense in your budget for three to six months, at a minimum. To calculate the emergency funds you’ll need, multiply your monthly budget by the number of months you’d like to have in reserve. You can also use an emergency fund calculator to help estimate what this amount should be.

How to Build an Emergency Fund For the Unexpected

The best way to create an emergency fund is to start a new savings account at your bank. A modest deposit of even a few hundred dollars can help motivate you to put cash aside every month. Don’t have one set up? Here’s how to start an emergency fund savings account:

Automate a monthly savings transfer

Schedule a monthly transfer of funds from your checking account to your emergency fund savings account. This can be accomplished by logging into your bank account online or through your bank’s smartphone app and setting up a recurring transfer.

Deposit your IRS tax return into your emergency fund

In many households, the tax refund is one of the larger sums of cash received over the course of the year. If you can’t put the entire amount towards your emergency savings, do your best to earmark a large percentage of that windfall towards your rainy-day fund.

Build a budget and stick to it

By getting serious about savings, you just might find a surplus of funds each month. And those additional small monthly contributions can add up quickly over time. By charting exactly how much cash is moving in and out, you’ll be well on your way to meeting your one-year financial goal.

Sock away your cash

Make a habit of socking away a few spare dollars from your wallet each month and hide that money away until you can deposit it at the end of the month.

Install a budgeting app on your smartphone

One great way to understand monthly spending is to use a budgeting app. Also available online, services like Mint (Opens in a new tab) and YNAB (You Need a Budget) (Opens in a new tab) can really shed light on how to free up funds by spending less and saving more.

Use an emergency fund calculator

Calculators like those offered for free via MoneyUnder30 (Opens in a new tab) and NerdWallet (Opens in a new tab) crunch the numbers after you input a few basic details about your monthly expenses. How do you calculate an emergency fund ratio? Let the calculator do it for you. You’ll receive a savings figure based on the data you input. The rest is up to you.

Take your time when building your emergency savings fund

Ideally an emergency fund should contain enough financial savings to cover your major expenses for six to nine months. If you’re just starting a savings account and that amount seems challenging, that’s okay. Even that first dollar you put aside is a step in the right direction! Take your time and be proud of the effort you’re making.

Explore how your expenses affect your emergency savings fund

List your expenses. Look at your regular fixed and fluctuating expenses and estimate how much you spend monthly. This gives you a target amount of savings for your emergency fund. Things to consider: housing, utilities, food, transportation, insurance and personal debts.

Pay yourself first before adding to your emergency savings fund

This piece of advice is one you’ll hear a lot from financial planners — mainly because it’s a great tip and you deserve it! Your immediate expenses should always come first and then you should put money aside for your future goals. Make it a habit with each paycheck. Better still, arrange to have a percentage of your salary automatically transferred into a savings account by your employer so you’re not even tempted to use it elsewhere.

Get creative when saving for an emergency fund

In addition to regular contributions from your paycheck, start thinking of creative ways to save money. Can you cut back on your entertainment expenses? Do you have things you never use that you can sell? Are you shopping for deals and using coupons? Stretch your imagination and watch your emergency fund account grow.

Discuss your emergency savings fund with your banker

Talk to your banker to find out what type of savings account is best suited to your needs. You’ll want to learn about the APR they’re offering and the minimum emergency fund amount you can deposit. You’ll also want to know the best way to access your money when an emergency arises.

Where Should I Keep My Emergency Fund?

You have a lot of options when it comes to where to put emergency funds. From high-yield savings accounts to investing in a certificate of deposit, it can be beneficial to invest in short-term savings ideas that can help you rack up interest along the way:

Invest in a money market account

Similar to a high-yield savings account, money market accounts promise a certain percentage of return over your investment. But you’ll need to commit to a period of time. In most cases, you’ll need to sign on for at least a 6-month contract. But if you find yourself needing to dip into that savings to pay for a new dishwasher, some accounts allow you a limited number of monthly withdrawals.

Put your emergency fund money into a high-yield savings account

Available online where you can transfer funds directly from your checking or savings account, high-yield savings accounts can be a smart way to save. Many don’t require a minimum balance, have nominal fees and sometimes pay a higher annual percentage rate than your local brick-and-mortar bank. 

Consider certificates of deposit

If your finances are rather stable and you’ve got a fair amount of liquid cash in your checking account, moving some of it into a certificate of deposit (CD) for a period of time can be a great way of building an emergency fund. Be aware that you won’t be allowed to access your money until it’s maturity date which can range from a few months to decades. But you’ll typically benefit with a better return on investment when compared to other emergency fund savings options.

Grow your emergency savings with a Roth IRA

Although you may have to pay a stiff penalty and potentially taxes for early withdrawal, Roth IRAs work well because they’re paid out on a pre-tax basis from your monthly payroll. Depositing into a Roth individual savings account this way decreases your annual taxable income.

And that can potentially save you thousands in money you’d otherwise need to hand over to Uncle Sam. So, it’s important to work with a financial advisor to be sure the idea’s a winning prospect.

Leverage several emergency fund savings options

Blending your savings strategy across several of the options identified here may work best for you. By leaving a few thousand dollars in an immediately available high-yield savings account, you’ll be able to access some cash when you need it.

But with the larger parcels of money earning more each year in a Roth IRA, you could accelerate your advance towards financial security. And with larger segments of your funds locked into two- or five-year CDs, you’ll have a diversified portfolio earning every cash for you step of the way.

The best news is that you’re protecting your goals by being proactive. Slowly building an emergency savings account is a solid investment in your future!

Prepare Your Finances for the Unexpected

When the unexpected occurs, you'll want to be prepared. There are many things to keep in mind when building an emergency fund, although saving money is a crucial first step for many. While you’re exploring your emergency fund strategies, be sure to check in with your American Family Insurance agent (Opens in a new tab) and review your coverage limits. You may be able to save more by paying your premium annually or by increasing your deductible.

This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.

Related Articles

  • Family of four walking hand in hand down beach
    Family of four walking hand in hand down beach
    Ways to Save Money for a Family Trip

    Among the many joys of being a parent is the opportunity to share your passions with your children. From exploring your favorite hobbies to diving into cherished family recipes, as your kids grow so do the memories you create together.

    Going on vacation with your children is a great way to bond with them, but it can get costly. The good news is that getting out of town doesn’t have to break the bank. Plan for your next family adventure by exploring the tips in these family vacation FAQs.

  • Man using entering his credit card info into his cellphone.
    Man using entering his credit card info into his cellphone.
    Credit and Identity Theft Monitoring

    Protecting your home with a security system and locking your doors when you leave for the day are measures you might take to protect your home from intruders. Credit and identity theft monitoring are a type of “security system” that protects you from intruders gaining access to your personal information. From credit fraud to identity theft, everyone is susceptible to these types of breaches — that’s why it’s so important to defend yourself against them.

    Credit monitoring and identity theft protection are two different ways to proactively protect yourself if your personal information gets into the wrong hands. Let’s take a look at the differences and why it’s important to implement them both together.

  • Couple looking at housing prices
    Couple looking at housing prices
    Saving for a House

    There are a few defining moments in our lives. For some, it’s the realization that buying that first home is within reach, both financially and emotionally. It’s a big step, and it’s one that’s built into the American dream. And if you’re left wondering how much money you should save before buying a house, you’re not alone. These costs can add up quickly.

    After you’ve made the big decision to start shopping for a home, you might be surprised to find that coming up with the cash down payment is only one of several financial hurdles you’ll need to clear. Exactly how much you should save for a house depends on a number of factors, like the value of the home you’re targeting and the amount of money you intend on pushing into your down payment.

  • A white woman budgets for saving money using a calculator at a cafe.
    A white redheaded woman works on her budget for saving money with a calculator at a cafe.
    Pay Off Student Loans or Buy a House?

    After college, life moves fast. You get your first big job, move out of your parents’ house and start a whole new life on your own. For most people, this also means paying off student loan debt from your college tuition. Having this debt may make big milestones like buying a house seem far off, but there are ways to make the leap from renter to homeowner even if you have student loans. So can you get a mortgage while also paying off student debt? Or should you wait to pay it off before you buy a house?

    Every situation is different, so it’s important to do the right research and choose the best option for you. Luckily, we’ve done some of the breakdown for you to help you decide whether to pay off your student loan entirely or buy a house.

    Can Student Loans Affect Buying a House?

    Typically, student loan debt doesn’t prevent you from getting a mortgage. The biggest thing to note is that student loan debt does influence your debt-to-income ratio, which is a factor lenders consider before giving you a loan. It can also affect the interest rate you pay on your mortgage.

    Buying a house with defaulted student loans

    If you’ve defaulted on your student loans, it’ll be more difficult — but not impossible — for you to get a mortgage. Because defaulting negatively affects your credit score, lenders will be less likely to want to give you a loan or will charge a much higher interest rate on a loan.

    Getting a home loan with student loan deferment

    If you’ve deferred your student loans, this usually won’t affect your chances of getting a mortgage. Just be sure to consider how the future estimated payments will factor your debt-to-income ratio. Some types of mortgages may reject applicants with deferred loans, so do your research on the different types of mortgages before shopping.

    Should You Pay Off Student Loans Before Buying a House?

    Buying a house is expensive, there’s no doubt about that. It can seem smart to hold off on house shopping while you still have student loan debt, and it can be even more difficult to save for a house if you’ve got a high debt-to-income ratio. But if you have enough income to handle the payments for both, you may want to consider investing in your first home.

    Signs You Should Pay Off Student Loans

    When considering whether to pay student loans or save for a house, there are a few factors that can help you decide if paying off your student loans should be a priority.

    Your debt-to-income ratio is too high

    If the amount of money you bring in monthly or yearly is almost the same as the amount of money you pay out in debts — like student and car loans or credit cards — it may be best to pay down your debt before buying a house.

    You’ve defaulted on your loans

    Defaulting on your loans has a severe negative impact on your credit score, which tells lenders that you’re a bigger risk to take on. Work on improving your credit score before shopping for a mortgage.

    You’re struggling to make payments

    If you feel like you’re living paycheck to paycheck or struggling to make payments on your loan every month, it’s best to hold off on saving for a house. Need help keeping track of your student loan payments? Try our student loan payment tracker to get organized.

    You haven’t saved for a down payment or emergency fund

    Before you start picking out which houses you want to tour, you should take a look at your savings. If you don’t have enough for a 5 to 10 percent down payment or enough as an emergency fund for home expenses — like a broken dishwasher or damaged roof — take more time to put money away for your first home.