What Is an Emergency Fund?

What Is an Emergency Fund?

An emergency fund is a pool of money you can draw on to pay for surprise expenses, like unplanned medical bills, or to keep you afloat during difficult life events, such as a layoff or divorce. Ideally, you'll keep an emergency fund separate from the bank accounts you use for daily financial transactions, and you'll ensure the account is funded at all times (more on how much to keep in your emergency fund below).

Saving for emergencies in advance is a proactive way to give yourself the gift of greater financial security. It also gives you the freedom to make choices—such as leaving a relationship or agreeing to a medical procedure—that can truly impact your quality of life.

Learn more: How Many Bank Accounts Should I Have?

Why Is It Important to Have an Emergency Fund?

It's crucial to have an emergency fund to address financial setbacks, avoid taking on debt and minimize the long-term impact of a financial crisis.

Here are some common expenses that an emergency fund can help cover:

• Unexpected medical costs: Even if you have health insurance, you may receive a large hospital bill you didn't see coming. Or you may need to pay for a medical procedure that your insurance covers only partially, or not at all.
• Job loss: If you suddenly lose your job, an emergency fund can help you pay bills until you find a new one.
• Car repairs: Particularly if you rely on your car to get to work every day, car repairs can be urgent—and costly, in the case of a new transmission or engine replacement.
• Home repairs and other costs: A leaky roof, broken refrigerator or other home emergency can be expensive and inconvenient, requiring quick action. Homeowners insurance will likely cover some home repairs (depending on circumstances), but you may also have to chip in, depending on the insurance policy and the issue.

In short, use your emergency fund for any expense that is unexpected, urgent and absolutely necessary.

Tip: Avoid taking money out of your emergency fund to pay for a vacation, buy gifts, lend money to someone or cover ongoing, anticipated expenses. An account for specific upcoming costs, called a sinking fund, would be a better choice in these cases.

How Much Should Be in an Emergency Fund?

Experts suggest saving three to six months' worth of basic living expenses in an emergency fund.

To do that, tally up your monthly necessities, such as your rent or mortgage payment, groceries, utilities, minimum debt payments and insurance. Multiply that by the number of months' worth of expenses you want to save. That's your goal, and it's OK if it takes a while for your account to be fully funded. You may decide to save more than six months of expenses if you're the sole earner in your household, you have an irregular income or you work as a freelancer.

Where Should I Keep My Emergency Fund?

Keep your emergency fund in a dedicated bank account, separate from the checking account you use on a regular basis. That helps ensure it will stay intact and ready for use when the need arises. It's also key to ensure you're able to withdraw money quickly when necessary. Here are some options to consider.

Interest-Bearing Bank Accounts

For the most easily accessible emergency fund, choose a bank account—and ideally, one that allows you to earn more interest than a traditional savings account pays. Try one of these two options:

• High-yield savings account: A high-yield savings account can help you earn more on your emergency savings than a traditional savings account. You can open one at a credit union, an online bank or a traditional bank. While the national average annual percentage yield (APY) for a savings account was 0.40% as of October 2025, some high-yield savings accounts earn 4% or more.
• Money market account: A money market account also offers higher interest rates than standard savings accounts and is offered at most banks and credit unions. They differ from high-yield savings accounts in that they typically allow withdrawals using personal checks or debit cards and may require a higher initial deposit and ongoing minimum balance.

Short-Term Investments

Some people choose to keep a portion of their emergency savings in low-risk investments, rather than bank accounts, in the hopes of earning a higher return. If you take this route, first ensure that you have a significant portion of emergency savings in a bank account that you can access immediately, without having to worry about maturity dates or withdrawal penalties. Then you can consider keeping some emergency savings in short-term investments like these:

• Treasury bills: Treasury bills, or T-bills, are short-term bonds with fixed interest rates and maturities of up to a year. You can buy T-bills directly from the federal government at TreasuryDirect.gov, and when you sell them after their maturity date, you could earn a modest return. But they're not as liquid as savings kept in a bank account, and their returns may not be as high as you could find with a certificate of deposit (CD).
• Certificates of deposit (CDs): A CD is a type of deposit account that requires you to leave your money in the account for a certain period of time in exchange for a higher-than-average interest rate. There's almost no risk you'll lose money, but you must typically pay early withdrawal penalties to take out funds before the CD's maturity date. To make a CD work as a place to keep some emergency savings, go for a no-penalty CD or choose multiple CDs at various maturity dates, called a CD ladder, so you'll get access to the money at different periods if you need it.

How to Build an Emergency Fund

The best way to build an emergency fund is to automatically direct a portion of each paycheck to your savings account. That can be a challenge if you're on a tight budget or your income fluctuates. But there are ways to grow your emergency savings over time, no matter how much you earn. Here are basic steps to follow to build your emergency fund:

1. Set a Goal

Decide how much money you need in the account. If you're building it from scratch, set an initial goal that feels attainable, like $500 or $1,000. You can also calculate your monthly expenses and start your savings journey by aiming to save one or two months' worth of basic costs. Once you hit that milestone, set new goals until you build your savings up to the amount you'd like to have in your account consistently.

2. Create a Budget

Now that you have a goal, you'll need to devise a plan for how you'll get there. Budgeting for savings is key to freeing up money for a starter emergency fund. If you don't already have a budget that includes your savings goal as a top priority, you can create a budget now.

Building a budget may include reducing expenses or increasing income to allow you to save more. You can also grow your emergency fund by funneling windfalls into savings. If you get a tax refund or money for your birthday, for example, add it to your emergency fund.

3. Set Up Automatic Transfers

Once you have enough in your budget to save regularly, establish a recurring automatic transfer from your checking account to your emergency fund. Set it up so that it arrives in your emergency fund once a month or every time you get paid, also called the "pay yourself first" method of saving. This way, you won't forget to contribute to your emergency fund and you won't have the chance to spend the money.

4. Monitor Your Progress

Check your savings balance regularly, such as each payday, to ensure your deposits are accurate and to celebrate your progress.

Avoid tapping into funds except in the case of a true emergency. When you do use your emergency savings, make a plan for replenishing the funds once the crisis is behind you.

Learn more: Tips to Boost Your Emergency Fund

The Bottom Line

An emergency fund is a path to increased financial security, since you'll know that you're covered if the unexpected happens. You'll also be able to avoid a big credit card balance or new loan payment as a result of borrowing to pay for an unforeseen expense.

Apart from the financial and psychological benefits of having funds budgeted for emergencies, you can apply what you've learned about creating following through on savings goals to other parts of your financial life. Once you have a sturdy emergency fund, for example, you can bring the same approach to saving for retirement or building a down payment on a house—strengthening your financial foundation for the long term.