If you're financially unprepared, a medical issue, car problem, or job loss can devastate your finances. That’s why it’s prudent to have funds stashed away in an emergency fund to cover unexpected expenses both large and small.
Here’s how to build an emergency fund, including how much money you should save and when it's appropriate to dip into your "rainy day" savings.
What Is an Emergency Fund?
An emergency fund is money you set aside in a bank account in case of unplanned expenses. These expenses can be as minor as needing to replace a kitchen appliance or as major as needing to cover several months' worth of bills due to the loss of a job, illness, or injury.
Why Should You Have an Emergency Fund?
An emergency fund may help you stay afloat financially in case of an unexpected expense. In the event of the proverbial "rainy day," an emergency fund may allow you to avoid relying on high-interest personal loans or credit cards, or having to tap into funds set aside for a long-term savings goal, such as retirement. For many, this added financial buffer brings a greater sense of stability and control during uncertain times.
How Much Money Do You Need in Your Emergency Fund?
The ideal amount of money in your emergency fund depends on your financial needs. To estimate the amount you need, start by looking at your regular monthly income, the number and needs of your dependents, and your mandatory monthly expenses.
Experts generally recommend safely tucking away three to six months' worth of living expenses in an emergency fund account that is separate from your primary checking and savings accounts. A larger sum may be necessary if you're the sole earner in the household. You can use PNC's Safety Net Calculator to help determine your emergency savings goal.
It's common for the total recommended amount to feel out of reach, especially if you're just starting out. If you're living paycheck-to-paycheck, it may seem nearly impossible. However, there's nothing wrong with starting small. Set an attainable goal, such as $25 per week, and commit to building up your account. Setting up an automatic savings plan or a split direct deposit may help you save more consistently.
As you start earning more money, increase your contributions until you've reached the goal. If you receive a windfall such as an inheritance, consider adding this to the account as well.
The most important thing is to start right away. After all, having a small amount of money saved for an emergency is better than being caught by surprise with no savings at all.
Where Should You Keep Your Emergency Fund?
Typically, emergency funds are kept in bank accounts that pay interest and allow easy access to your money. High-yield savings accounts and money market accounts are two common options. These accounts may earn more interest than standard savings accounts, helping your money grow while it sits idle. They're also generally protected by the Federal Deposit Insurance Corporation (FDIC) up to the legal limit, giving you additional protection in the unlikely event of a bank failure.
When an emergency arises, you can typically withdraw funds using an ATM, or by visiting a bank branch. Many banks impose monthly transaction limits on savings and money market accounts, so they're not an ideal choice for everyday spending. However, since your emergency fund should ideally remain untouched until it's needed, these types of accounts are often a smart choice.
Where Not to Keep an Emergency Fund
Avoid keeping your emergency fund in accounts tied to daily spending. A checking account may seem convenient, but regular access increases the likelihood of using the funds for non-emergencies, either by accident or habit.
Certificates of deposit (CDs) are another common but often unsuitable option for emergency savings. While CDs may offer higher interest rates, they lock your money in for a set term, often several months or years. Accessing funds before maturity typically triggers early withdrawal penalties, which may reduce your principal or interest earned. This lack of flexibility makes CDs better suited for planned savings goals with fixed timelines, rather than unplanned expenses that require fast access.
Also, avoid keeping emergency funds in investment accounts or retirement accounts, which may carry market risk, tax implications, or penalties for early withdrawal. Ideally, emergency funds should be shielded from risk and accessible without restriction.
How Do You Build an Emergency Fund?
Here are some steps to help you get started building an effective emergency fund:
- Open a savings account. The first step is to open a savings account at your bank. You may choose to keep your emergency fund in a high-yield savings account or a money market account to get the most bang for every saved buck. Keep in mind that, no matter which kind of account you choose, it's critical that you’re able to access your money when it's needed most.
- Determine how much you need to save. A useful guideline is to save at least three to six months' worth of basic living expenses (think rent or mortgage payments, utility bills, food costs, gas or transportation costs, etc.). You can use PNC's Safety Net Calculator to determine how much you should aim to have in your account.
- Start with a monthly savings goal. It's unlikely you'll be able to transfer three to six months' worth of living expenses into a new savings account right away. You'll need to determine how much of your monthly income you can afford to set aside in your emergency fund. Don't worry if you can't afford to save a huge chunk of your income right now; every bit counts.
- Set up direct deposit. If your employer offers direct deposit for your paycheck, it's possible that they might be able to split the total deposit amount up into two accounts. If so, arrange for a determined dollar amount to be deposited into your savings account every month. If your employer is unable to directly deposit your paycheck into two separate accounts, you may be able to set up automatic monthly transfers from your checking account to your savings account (especially if both accounts are at the same bank). By having the money directly deposited into your savings account, you'll avoid being tempted to keep some or all of your emergency fund money in your checking account.
- Grow your savings over time. After you've started tucking money away into your emergency fund, see if you can increase your savings amount by a small percentage. For example, you may decide you don't need another streaming subscription after all and put that $10 per month into your emergency fund instead.
- Add money from windfalls. If you receive any unexpected income (aka a windfall), such as an inheritance, a lottery win, or a sizable tax refund, put some or all of it into your emergency fund.
- Replenish your emergency fund. If an emergency arises and you use some or even all of the money in your account, it's important that you keep saving to replenish the used amount as soon as possible. This way, if another emergency were to occur, you'd be able to cover that as well.
When Should You Use Your Emergency Fund?
Because your emergency fund should be used only for emergencies, you should avoid using it to pay for day-to-day expenses or non-essential purchases.
Instead, think carefully about how you define what constitutes an emergency. That way you'll be able to recognize one when it happens.
What are some emergencies? A few of the big ones are the loss of a job, unexpected medical or dental treatments, replacing a major household appliance, or financing a major car or home repair. Some others might include replacing a broken computer or having to fly home for a family emergency.
If you're unsure if something constitutes an emergency, ask these questions:
- Is this a necessary expense? In other words, will my life be significantly disrupted if I don’t spend the money?
- Does this expense need to be handled immediately?
- Was this expense unforeseen?
If you answer “yes” to any one of these questions, you may feel comfortable using money from your emergency fund. Just remember to replenish it once the crisis has passed, and you have the means to start building it up again.
How to Balance Emergency Savings vs. Paying Off Debt
Finding the right balance between building savings and paying down debt can be challenging, especially when both feel urgent. Starting an emergency fund (even a small one) may provide a financial buffer that helps avoid taking on more debt if unexpected expenses arise. At the same time, making steady progress on existing debt helps reduce interest costs over time.
Rather than focusing on one over the other, consider splitting your efforts. Set aside a manageable amount each month for savings while directing extra funds toward debt with the highest interest rates. As your income grows or expenses shift, adjust the approach to make faster progress on either goal. While the right balance will depend on your needs, steady contributions to both may help build long-term financial stability.
The Bottom Line
Emergencies can happen to any of us at any time. In fact, they have a way of taking place at the worst possible moment.
Dealing with a crisis can be stressful enough without having to worry about money.
An emergency fund that covers three to six months' worth of living expenses — and ideally more — may prevent you from relying on high-interest personal loans and credit cards. But, even more importantly, it can also provide you with long-term peace of mind.
