What are emergency funds and why are they important? (2024)

Money Management

That’s where an emergency fund can come in.

Emergency funds, also known as emergency savings, refer to the money you set aside in an account for unforeseen circ*mstances. Think of it as a financial safety net.

With more than half of American adults lacking sufficient savings to cover a $1,000 emergency expense¹, emergency funds can be key to getting through unexpected situations. So, whether you're just starting out on your financial journey or looking to improve your finances, keep reading to learn about emergency savings, why many consider them important, and ways to get an emergency fund started.

Difference between savings accounts and emergency funds

Savings accounts are a type of bank account that allow you to save money and earn interest on your deposits. While an emergency fund is typically held in a savings account, not all savings accounts are considered emergency funds.

The key difference between a savings account and an emergency fund is the purpose of the money. A savings account can be used for any financial goal, such as a down payment for a house or a vacation, while an emergency fund is specifically set aside for unexpected expenses.

How to pay into an emergency fund

Those building an emergency fund typically dedicate a recurring portion of their income toward their emergency savings. Keep in mind that an emergency savings account functions like any other savings account in terms of how it’s funded.

Some ways you can pay into an emergency fund are by:

• Automating savingsby setting up adirect depositfrom your paycheck into your emergency fund account, which can help ensure that you consistently contribute to your emergency fund without having to think about it.
• Transferring money manuallythrough online banking or by visiting a bank branch.
• Depositing checks or cash.

Tips on how to save for an emergency fund

Ready to build your emergency fund? Consider these money management tips:

• Set a specific goal.Determine how much you need to save for emergencies. A common rule of thumb is to save three to six months' worth of living expenses, but each person’s needs depend on their own personal circ*mstances.
• Create a budget for your emergency fund.Set a monthlybudgetfor your emergency fund contributions. You could use budgeting apps or spreadsheets to help you keeptrack of your expensesand savings.
• Keep your emergency fund separate.Open a separate savings account or utilize asavings appfor your emergency fund. This could help you avoid dipping into the money for non-emergency expenses.
• Start small.If you can't afford to save a lot at first, consider starting with small contributions and gradually increasing them over time.
• Review your emergency fund regularly.Check your emergency fund balance regularly and adjust your savings plan as needed based on individual circ*mstances.
• Be patient.Building an emergency fund takes time and discipline. Don't get discouraged if it takes longer than you anticipated to reach your savings goal.

Emergency fund FAQ