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Emergency fund: What it is and how to build one

An emergency savings account can help keep you afloat when the unexpected happens.

Putting money aside for emergencies like car and home repairs or healthcare can help you stay out of debt and makes good financial sense. But knowing where to put your emergency fund can be confounding. There are many different options, including high-yield savings accounts, money market accounts, CDs, IRAs and Treasury bills. Here’s how to decide which one is best for you.

What is an emergency fund?

An emergency fund is a financial safety net you can rely on if a major unexpected event happens in your life. At the same time, keeping your money in an account you keep for your emergencies can help you earn interest and reach your goals faster. Unlike rainy day funds that are meant for smaller, one-off expenses, an emergency fund is there to help in significant times of crisis. People commonly use emergency funds for:

  • Job loss
  • Major illness or injury
  • Major home repairs caused by natural disasters, water leaks, mold, etc.

Who is it best for?

Everyone should create an emergency fund for themselves. No one is immune to the financial effects of an emergency and having any kind of funds set aside will go a long way to keeping you stable during an uncertain time.

3 steps to build an emergency fund

Here’s a step-by-step guide on how to start an emergency fund.

  • Create a budget. You won’t know how much you’ll need to save each month for your emergency fund until you know how much you spend each month. That starts with creating a budget.
  • Decide how much to save. If you’re just starting your emergency fund, set a smaller goal of $500 or $1,000. Once you get there, you can set a higher goal of three to six months’ of expenses, depending on your needs.
  • Decide where you’ll keep your money. There are six types of accounts to choose from. You’ll want to factor accessibility, fees, and interest when comparing your options.

Where should I put it?

There is no right type of account to keep your emergency fund. But you’ll want to choose one that earns you interest and helps you reach your savings goals. Here are six accounts to consider:

High-yield savings accounts

A savings account is the most common account used for emergency funds. If you’re going to take this route, look for a high-yield savings account with minimal fees. Some popular options are Discover Online Savings and American Express® High Yield Savings Account.


  • Strong APYs. Many banks — such as Synchrony High Yield Savings — offer savings accounts with competitive rates. These guaranteed returns help you grow your money even faster.
  • Optional ATM cards. Some savings accounts come with an ATM card that lets you withdraw cash on the go. This could be useful for an emergency fund as long as you’re not tempted to spend the money on other things.
  • Minimal fees. Most high-yield savings accounts are offered by online-only banks with little-to-no fees, so you don’t have to worry about losing a chunk of your savings to miscellaneous charges each month.


  • Limited withdrawals. You typically can’t make more than six withdrawals from a savings account each month. But due to the coronavirus pandemic, many banks are waiving this requirement.
  • Could be inconvenient. If you open a high-yield savings account with an online-only bank, you may have to transfer money to an external account to withdraw funds if it doesn’t come with an ATM card.

Money market accounts

Money market accounts work just like savings accounts but with the added flexibility of checking accounts. For example, BankPurely Money Market and Sallie Mae Money Market both come with debit cards and checkwriting privileges, and they earn competitive APYs.


  • Competitive APYs. Some money market accounts have higher APYs than high-yield savings accounts, although this isn’t always the case.
  • Easy access to your money. Unlike savings accounts, money markets come with a debit card and checkwriting privileges to help you cover unexpected expenses quickly.


  • Potential fees. Some money market accounts have high fees, so make sure you find one with a bank that won’t take a bite out of your savings each month.
  • High minimum balance requirements. Some banks require opening deposits of $2,500 or more for money market accounts, which could put them out of reach if your emergency fund isn’t big enough.
  • Limited withdrawals. As with savings accounts, you typically can’t make more than six withdrawals. However, your bank may be temporarily waiving this policy during the coronavirus pandemic.

Digital bank accounts

A digital bank account is similar to a high-yield savings account, but it typically comes with more tools and features to help you budget your money. Some popular options are Qapital and Digit.


  • Helpful tools. Digital banks have cutting edge mobile apps that help you set savings goals, track your spending and save automatically through round-ups and recurring transfers.
  • Few fees. Most digital banks have low overhead, which means they pass these savings onto you in the form of low fees.


  • No physical locations. Similar to high-yield savings accounts, most digital banks don’t have branch locations. Customer support is limited to live chat or phone.
  • May not earn interest. Some digital bank accounts have low interest rates or don’t earn interest at all. But you could end up saving just as much in the long run thanks to insights that help you spot extra cash in your budget.


When you store your money in a certificate of deposit (CD), you agree to lock your money away for anywhere from three months to 10 or more years. You get a high, guaranteed APY, but you’ll pay a penalty if you need your money before it’s time.


  • Highest APY of any bank product. If you want to keep your money at a federally-insured bank, a CD will offer you the highest interest rate on your money. To date, Marcus by Goldman Sachs and Pen Air offer some of the highest CD rates in the country.
  • APY doesn’t change. Savings account and money market rates are variable, meaning they could change at any time. But CD rates are locked in until maturity, so you don’t have to worry about your APY dropping.
  • CD ladders. If you want to invest in CDs but still maintain access to your money, open several CDs with staggered terms. With this strategy, each CD will mature on a rolling basis, so you maintain frequent access to your money.


  • Early withdrawal penalties. If you need to access your money before your CD matures, be prepared to pay a hefty penalty.
  • Restrictive. Because it’s impossible to know when you’ll need to use your emergency fund, you may not want to lock all your money away in a CD.
  • Higher minimum deposit requirements. Opening deposits could be as low as $0 or as high as $10,000 depending on which bank you go with.

Roth IRAs

A Roth IRA is a retirement vehicle that’s funded with after-tax dollars. But they’re also a great place to store your emergency fund.


  • Higher potential rate of return. You invest your Roth IRA in the stock market, which means you could earn a higher return than you would with a savings account, money market or CD.
  • Can withdraw principal balance at any time. Unlike other retirement accounts, you can withdraw the money you put into your Roth IRA at any time without penalty.
  • Tax-free withdrawals. Qualified Roth IRA withdrawals are always tax-free, so you won’t have to worry about paying taxes on the money you take out.


  • Returns aren’t guaranteed. Unlike bank accounts that are federally-insured, you could lose some of your principal balance if you don’t invest your Roth IRA funds wisely.
  • Possible early withdrawal penalty. You could pay a 10% early withdrawal penalty if you withdraw interest for a nonqualifying expense before age 59 1/2.
  • Takes time to withdraw money. Accessing funds in a Roth IRA could take a couple of days if your custodian needs to sell off some of your investments and transfer the proceeds to your bank account first.

Treasury bills or bonds

Treasury bills or T-bills are short-term bonds backed by the US government. You typically buy them at a discount and sell them for profit at maturity.


  • Tax-free interest. With a bank account, any interest you earn is considered taxable interest. But Treasury bill interest is typically tax-free, which means you’ll add even more cash to your emergency fund.
  • Low minimums. Usually, $100 is all you need to start investing in Treasury bills, making it a good option for those with a limited budget to start.
  • Multiple maturity lengths. T-bill maturity dates range from four weeks to one year, so you can choose a term that’s comfortable for you. You can also stagger terms to maintain access to your money during an emergency.


  • Not federally-insured. T-bills are backed by the US government, so they’re low-risk. But returns aren’t guaranteed.
  • Interest paid at maturity. You can sell Treasury bills before maturity if you’re in a pinch, but you won’t receive any interest.
  • Not easily accessible. If you need to access your money before your T-bill matures, it could take a couple of days to sell your investment, process the transaction and receive your funds.

How to choose an emergency fund

Consider these six factors when comparing accounts:

    1. Access. Choose an account that gives you easy access to your funds. For example, a CD might not be the best choice for emergencies as you’ll be penalized for withdrawing money before the terms is up.
    2. Customer service. Check that the bank’s customer service is available during times you need them and that they offer services beyond email and phone.
    3. Interest. Check the account’s interest against the FDIC’s current national average. The current savings average is at 0.46% APY.
    4. Deposits and withdrawals. Check that the account makes withdrawals easy. For example, savings accounts limit you to six monthly transactions though you’ll find some that come with an ATM card.
    5. Fees. Check if the account comes with a fee. Most savings accounts don’t come with monthly fees, so compare your options if you find one that does.
    6. Safety. Make sure that the account you open is at an NCUA- or FDIC-insured bank.

Compare emergency fund account options

Use this table to compare these six popular accounts to keep your emergency fund in:

Savings accountsMoney marketDigital bank accountsCDRoth IRATreasury bills
Easily accessible
Guaranteed returns
Low opening deposits
Minimal fees
Low-risk account
A photo of Alexa Serrano Cruz, CAMS

Expert tip: Choose an accessible savings account

While more restrictive accounts, like CDs and Roth IRAs, may offer higher interest rates to grow your money, they charge a penalty if you need to access your cash in an emergency. Be sure to weigh the pros and cons before locking your money away for a specific time. Choosing a more accessible account like a high-yield savings account or money market savings account helps give you faster to your money during an emergency — especially if it comes with a debit or ATM card.

— Alexa Serrano Cruz, CAMS, Senior Editor, Personal Finance.

Can I keep my emergency fund in cash?

Yes, but it’s probably not a good idea to do so. That’s because you might not be able to access your cash if and when an emergency strikes and you’re away from home. And if your funds go missing or get stolen, you may never see that money again. By keeping your emergency fund at an insured financial institution, you’ll have more peace of mind because the money will remain safe and accessible.

How much should I put in my emergency savings?

A general rule of thumb is to save between three to six month’s worth of expenses, while some experts suggest saving for up to one year. However, how much you can contribute depends on your income, expenses and financial goals among other factors.

You can start a small emergency fund with as little a few hundred dollars, which may come in handy for things like unexpected car repairs, pet emergencies or other essentials.

What if I’m living paycheck-to-paycheck?

If money is tight, it might be hard to find some extra cash to support your emergency fund. Instead, focus on what you can save rather than what you should save. Here are four tips to try to expedite your savings goals:

  1. Evaluate your monthly budget. Take a hard look at your spending and see if there are any areas where you can slim down on your budget. Reallocate those funds toward savings.
  2. Try different savings strategies. Experiment with different savings challenges to find a technique that works for you. For example, the $5 savings trick is to pay for everything in cash and stash away any $5 that you get back in change. Or try the penny challenge, which means you save a penny a day, two pennies on day two, three pennies on day three and so on. By the end of the year, you should have put away $667.95.
  3. Use a rewards card. Opt for a credit or debit card that pays you back for everyday spending. And some cards can help jumpstart your savings with generous signup bonuses.
  4. Open an interest-bearing account. A high-yield checking or savings account rewards you for saving. The more you have in your bank account, the more interest you’ll accumulate.

3 ways to calculate your emergency fund

There’s no one-size-fits-all when it comes to calculating your emergency fund. Here are three possible methods to determine how much you need to tuck away for a rainy day.

  1. Base method. With this method, you’d need to put away $500 to $1,000 for a few of the most common unexpected expenses like car repairs and medical expenses.
  2. Monthly method. Estimate your daily living expenses for one month. Multiply that amount by three or six months to have a nice cushion in your emergency fund. If your income is unstable, consider saving enough to cover expenses for six months or more.
  3. Dave Ramsey’s emergency fund. Dave Ramsey, a finance radio show host and author, combines the base and monthly method. He recommends starting with $1,000 in your emergency fund until you’ve paid off all of your consumer debt. Then, beef up your fund by saving three to six months’ worth of expenses.

Example: Emergency fund monthly method calculation

Here’s how much you might put away using the monthly method after breaking down your monthly expenses:

Dining out$350
Car loan$200
Miscellaneous expenses$150
Car insurance$100
Cell phone bill$75
Car fuel$50
Total expenses$2,540

If your goal is to have three months’ worth of expenses stored away, you’d need $7,620 ($2,540 x 3) in your emergency fund. For a more conservative savings plan of six months, you’d need $15,240 ($2,540 x 6).

Pros and cons of an emergency fund

Having an emergency fund comes with a host of benefits, but there are also a few caveats to keep in mind.


  • Gives you a safety net. An emergency fund reduces your chances of having to take on more debt when an unexpected expense pops up.
  • Reduces stress. Have peace of mind knowing you have money waiting if you lose your job, develop a serious illness or need to make major home or auto repairs.
  • Helps your credit score. An emergency fund doesn’t directly improve your credit. But it does help you avoid maxing out on credit cards and worrying about missing payments if hard times hit — two factors that can lower your score.


  • Takes time to build. It could take months or years to build up your emergency fund. You can speed up the process by saving unexpected money and using a budget to reduce expenses. If you need money now, consider an emergency loan as a last resort.
  • Potential withdrawal limits. You can typically only make six withdrawals a month from a savings account. There may also be limits on how much money you can withdraw at one time. For example, Bank of America only lets you transfer out $1,000 a day.
  • Doesn’t work for all account types. Avoid keeping your emergency fund in a CD where you’ll get penalized for accessing it early. Instead, opt for a high-yield savings account from a digital or online bank where you’ll have easier access to it.

2 emergency fund alternatives

Savings accounts are the most commonplace to park an emergency fund, but there are alternatives. If you’re looking for a nontraditional place to store your money or want to build an additional reserve beyond a standard emergency fund, consider these other options:

man holding his daughter

Cash-value life insurance

Life insurance is a financial product that’s good to have, but never fun to think about. A cash value policy can protect your family if you die, but you can borrow from the policy if you need access to cash. You’re not required to pay back these loans, but they affect the balance your beneficiaries receive when you die.

a woman opening a money market account

Bottom line

An emergency fund helps you prepare for the unexpected, so you can tackle surprise expenses head-on without jeopardizing your financial health. There are many different accounts you could use to store your emergency fund, including savings accounts, money market accounts, CDs, Roth IRAs and treasury bills. Whether you choose to keep your money in one of these accounts or spread across multiple accounts is completely up to you. The key is to keep it someplace safe, secure and accessible, so you always have money on-hand when an unexpected emergency pops up.

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