Key takeaways

• Build an emergency fund by setting a realistic savings goal, opening a separate account, and automating regular contributions over time.
• Start with $500 or $1,000 if needed, then work toward saving three to six months of essential expenses as your financial situation allows.
• Keep emergency savings safe and accessible, review the fund regularly, and replenish it after using money for unexpected expenses.

Having an emergency fund can help you cover unexpected expenses, such as home repairs or medical bills or provide financial security after an unplanned job loss. The majority of Americans (68%) have an emergency fund set aside, yet nearly half (46%) say their emergency savings are less than they had a year ago.

How can you build an emergency fund while still juggling everyday expenses, rent or mortgage payments, and other bills? You can begin taking realistic steps toward your financial safety net by understanding how to set savings goals and track monthly expenses.

How to build an emergency fund

You can begin building an emergency fund in five simple steps:

1. Set an emergency savings goal.
2. Open a separate account for your emergency fund.
3. Review your monthly expenses and cash flow.
4. Regularly fund your savings account.
5. Review and replenish your emergency fund.

1. Set an emergency savings goal

The amount you should have in emergency savings is based on personal factors and subject to change. Saving enough cash to cover three to six months of essential expenses is a good place to start, if feasible. Essential expenses can include housing, groceries, transportation, and other necessary bills.

The 3-6-9 rule is a general guideline for determining how many months of essential expenses to keep in your emergency fund:

• 3 months if your income is stable and you have a financial safety net.
• 6 months as a general benchmark if you have children or other large financial obligations, such as mortgages or significant medical bills.
• 9 months if you're self-employed or have an irregular income stream.

For example, using the six-month benchmark, you would start by estimating your monthly expenses, including housing, food, and necessary bills. Take your total monthly expenses and multiply by six to see how much you would need in emergency savings.

If saving for several months of expenses isn’t possible, you can start with an achievable goal — such as $500 or $1,000 — to still provide a cushion for smaller unexpected costs like car repairs or doctor visits. You can always reevaluate your savings goal once you hit your target, if your income rises, or if other circumstances change.

Read more: How to set financial goals & stick to them in 5 steps

2. Open a separate account for your emergency fund

Keeping your emergency fund in a separate account helps ensure it doesn't get spent accidentally. You can use traditional savings accounts, which give you easy access to funds when you need them. However, there are other types of deposit accounts that typically have higher annual percentage yields (APY) which could result in more interest earned on your deposits.

Here are a few alternative accounts to consider for your emergency fund:

• High-yield savings account (HYSA): A deposit account that functions like a traditional savings account and typically offers a higher APY. When held at an FDIC-insured bank, deposits are insured up to applicable FDIC limits, while keeping your money accessible and liquid.
• Money market deposit account (MMA): Similar to a HYSA, in that it typically features comparable APYs, and offers high liquidity and access to funds.¹ When held at an FDIC-insured bank, deposits are insured up to applicable FDIC limits. Unlike HYSAs, MMA account holders can write checks and use a debit card. Remember that money market mutual funds are investment products and are not included in this discussion, as they are not FDIC-insured.
• Certificate of deposit (CD): Another type of FDIC-insured deposit account that generally pays a fixed rate of interest for a specific term, ranging from one month to several years. Longer terms typically have higher yields than HYSAs and MMAs, but during this time withdrawals may result in penalties.²

Quick and easy access to funds from an HYSA or MMA can be important when a financial emergency occurs. However, CDs can offer higher fixed APYs, which may allow you to earn more interest on your savings. Before opening an account, carefully review all account fees, minimums, and variable APYs. Find out whether any withdrawal restrictions apply that might make it difficult to access funds when you need them.

3. Review your monthly expenses and cash flow

Understanding your monthly spending and cash flow can help in several ways. There may be opportunities to reduce spending and divert some or all the savings to an emergency fund. A closer look at your cash flow also might help you identify excess income that can go to your emergency fund.

To estimate your monthly spending and income, you can:

• Use an integrated financial tool that allows you to connect your accounts (and even investments) all in one place. This information can be used to display your monthly spending and income.
• Manually estimate your income and expenses per month using bank account and credit card statements. You can record this information on a spreadsheet, group similar expenses and income sources together, and add up the totals for each category. Doing this for several months may provide a more accurate prediction of your monthly expenses and income, which may fluctuate from month to month.
• Use a free online calculator, like the Empower Budget & Cash Flow Planner. If you already have an idea of your monthly expenses and cash flow, you can plug this information into the calculator for a quick estimate. It can also help visualize how much of your spending goes toward fixed versus variable expenses.

Estimating your cash flow can be more challenging when your income is unpredictable. In some cases, it may be possible to use your average income over the past three to six months as an estimate.

4. Regularly fund your savings account

Once you have an idea of your savings goals and budget, you can begin funding your account. When building your emergency fund, it can help to begin with a sustainable recurring amount. You can use the Empower Emergency Fund Calculator to visualize how contributing different monthly amounts may affect your overall savings goals and timeline.

Setting up automatic transfers may help ensure that funds are moved to your savings account on a regular basis, such as after paychecks are deposited. If necessary, identify areas where your spending can be cut back. Focus on making changes to your spending habits that are likely to last rather than severe reductions that wouldn’t be sustainable.

If your income is irregular, consider basing your contribution on a conservative estimate of your average monthly income. You can always transfer more to your emergency fund if your average income is higher than expected. Depending on where you keep your emergency fund, you may be able to set up automatic transfers to your savings when your main account reaches a certain balance.

Read more: CD vs. HYSA: Key differences and when to use

5. Review and replenish your emergency fund

Building an emergency fund is an ongoing process. When unexpected situations arise, you may find it necessary to dip into your savings. Take the opportunity to assess any changes to your income and monthly expenses that may impact your future savings progress. Direct any financial windfalls, such as work bonuses or tax refunds, to your emergency fund when appropriate.

The bottom line

Learning how to build an emergency fund starts with setting a realistic savings goal, understanding your monthly expenses, and choosing a safe, accessible place to keep your money. If your budget is limited, consider making small, consistent contributions to your savings.

As your income, expenses, or financial priorities change, revisit your savings goal and adjust your contributions as needed. After using your emergency fund, make rebuilding it part of your financial plan.

FAQ

Should I invest my emergency fund?

Investing your emergency fund comes with certain risks. Deposit accounts like HYSAs and MMAs held at FDIC-insured banks are generally eligible for FDIC insurance, subject to applicable coverage limits, including up to $250,000 per depositor, per insured bank, for each account ownership category. However, stocks, bonds, and mutual funds, including money market mutual funds, are investment products and are not FDIC-insured.³ And while investments may have the potential for greater returns than money held in a deposit account, their values can fluctuate. As a result, there's a chance that your money may be worth less when an emergency occurs.

What's the difference between an emergency fund and a sinking fund?

A sinking fund is money saved for known or somewhat predictable expenses outside a normal monthly budget. These expenses may include annual insurance premiums, holiday spending, or routine car maintenance. An emergency fund is instead reserved for unexpected financial events, such as the unexpected loss of income, an urgent repair, or an unplanned medical expense. Keeping your sinking fund and emergency fund separate can help avoid dipping into emergency dollars for predictable costs.