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Emergency fund: What it is and how to build one

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

Having an emergency savings account is a must for everyone. Putting money aside for emergencies can offer peace of mind in times of financial crisis. As to where to put your emergency fund, that’s up to you, but there are better options than to keep it stuffed under your mattress.

What’s an emergency fund?

An emergency fund is there to help cover unexpected events that would majorly disrupt your finances. Having one can help you avoid having to borrow money to stay afloat and keep your living expenses covered until you’re back on your feet financially. An emergency fund can help after losing a job or experiencing changes in your income, unexpected medical bills and vehicle or home repairs.

How much emergency savings should I have?

The rule of thumb for emergency funds is to save at least three to six months of monthly expenses. Factor in your housing, utilities, loans, groceries, transportation and other essentials you pay every month. The average emergency fund is $17,544, according to Finder’s Consumer Confidence Index. But depending on your living situation, you may need much more or less than that.

If you don’t have an emergency fund — and 55% of Americans say they don’t — then start small. Aim to tuck away at least $1,000 somewhere safe and keep it growing from there. While $1,000 may not cover three months of living expenses for most people, it could help with a rent or mortgage payment, car troubles or a week of temporarily reduced income.

Top high-yield savings accounts for emergency funds

Consider stashing away emergency funds in a high-yield savings account like these to maximize your savings.

Earn up to 4.60% APY

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on SoFi's secure site
  • Up to 4.60% APY on savings by meeting deposit requirements
  • $0 monthly or overdraft fees
  • Get a $300 bonus with direct deposits of $5,000 or more

Earn 4.35% APY

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on Barclays's secure site
  • 4.35% APY
  • $0 monthly fees
  • Get a $200 bonus with $25,000+ deposit. Terms apply

Up to 4.5% APY

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on Cash App's secure site
  • Up to 4.5% on your savings with eligible direct deposit
  • $0 monthly fees
  • Unlimited transfers between Cash and Savings accounts

Where should I keep my emergency fund?

We won’t tell you to remove your hidden bills from the rafters, but we will say that one of the better places to keep your emergency fund is in an insured deposit account, such as a high-yield savings account. We asked over 8,000 Americans where they put their emergency fund, and 56% reported a savings account, and 20% said it’s in cash.

Unlike a piggy bank, keeping your emergency fund in an interest-bearing deposit account puts your money to work thanks to compound interest and high-yield rates. It also gives you more access to your money when you’re not home and protects your funds up to $250,000 through FDIC insurance.

Some great places to put your emergency fund include:

  • High-yield savings account. These top-earning savings accounts can help your funds grow passively. Savings accounts with high rates can also help your money battle inflation, help you meet your savings goals faster and keep your funds safe. However, most savings accounts won’t come with an ATM card, so you may need to visit a branch or transfer funds to your checking account to access your cash in an emergency.
  • Money market account (MMA). An MMA is a deposit account that works like a savings account but with more access to your funds through checkwriting privileges or a debit card. Compared to a checking account, MMAs tend to offer much higher yields and might limit you to six monthly withdrawals.
  • High-yield checking accounts. For the most access to your funds, high-yield checking accounts (HYCAs) come with a debit card and unlimited transactions. With a high rate, the funds in a HYCA can passively grow, and you’ll have easy access to your cash in an emergency. However, checking accounts aren’t the best option for your savings, since you may be tempted to spend it. Plus, they often come with stringent requirements to start earning interest.
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 money in an emergency. Weigh the pros and cons before locking your money away. Choosing a more accessible account like a high-yield savings account or money market savings account gives you faster access to your money during an emergency — especially if it comes with a debit or ATM card.

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

3 steps to build an emergency fund

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

  1. Calculate your expenses.
    You won’t know how much you’ll need to save each month for your emergency fund until you create a budget to get a picture of your spending habits. Add up all your regular, essential monthly expenses to give you a baseline goal.
  2. 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.
  3. Decide where to keep your money.
    Factor accessibility, fees and interest when comparing your options. For example, savings accounts can offer ATM cards and ACH transfers for easy access to funds when you need them, but they may not earn the most compared to other options. CDs can offer stronger APYs than savings accounts, but you can’t withdraw funds early without facing early penalty fees.

How to choose an emergency fund

Consider these six factors when comparing accounts:

  • Cost. Not all accounts are free to open and maintain. Consider free accounts so your emergency fund doesn’t get chipped away by monthly fees.
  • Access. Choose an account that gives you easy access to your funds through a debit card, ATM card, transfers or checks.
  • APY. The higher the APY, the more you can earn over time. Compare an account’s interest rate against the FDIC’s current national average, which is currently 0.46% for savings accounts, 0.66% for MMAs and 0.08% for interest checking(1).
  • Deposits and withdrawals. Check that the account makes withdrawals easy. For example, some savings accounts may limit you to six monthly transactions.
  • Safety. Make sure the account you open is at an NCUA- or FDIC-insured bank.

Bottom line

An emergency fund helps you prepare for the unexpected and tackle surprise expenses head-on without jeopardizing your financial health. There are many different accounts to choose from, and whether you choose to keep your money in one or spread across multiple accounts is completely up to you.

The key is to keep your emergency savings someplace secure and accessible, and ideally, a savings account that can keep your funds growing.

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