Emergency Fund: How Much You Actually Need (and Where to Keep It)
An emergency fund is the foundation of personal finance. Without one, any unexpected expense — a car repair, medical bill, or job loss — turns into debt. With one, it's just an inconvenience you pay for in cash.
How Much Do You Actually Need?
The conventional advice is 3–6 months of expenses. This is correct, but the right answer depends on your situation:
3 months is enough if:
- You have a stable job with low layoff risk
- You have a spouse or partner with income
- Your expenses are low relative to your income
6 months is better if:
- You're self-employed or freelance
- Your income is variable or commission-based
- You have dependents (kids, elderly parents)
- You work in a volatile industry
What counts as "expenses": Monthly essential spending — rent, food, utilities, minimum debt payments, insurance. Not discretionary spending. If your bare-bones monthly number is $3,000, a 3-month fund is $9,000.
The $1,000 Starter Fund
If you have high-interest debt, don't wait to build a full emergency fund before paying it down. Start with $1,000 — enough to handle most car repairs and minor emergencies — then focus on debt. Once the debt is gone, build the full 3–6 months.
A $1,000 emergency fund is better than a $0 emergency fund. You can build the rest after you're out of high-interest debt.
Where to Keep Your Emergency Fund
Your emergency fund should be:
- Liquid — accessible within 1-2 business days
- Separate — not your regular checking account
- Low-risk — not in stocks or anything that can drop in value
High-yield savings accounts (HYSAs) are the right answer for most people. Current rates are 4–5% APY, compared to near-0% at traditional banks. SoFi, Marcus (Goldman Sachs), Ally, and Fidelity Cash Management all offer competitive rates.
What NOT to do:
- Don't keep it in your checking account — too easy to spend
- Don't invest it in index funds — your emergency fund can't be down 20% when you need it
- Don't keep it in a CD with early withdrawal penalties
- Don't keep it under the mattress (inflation, theft)
How to Build It Quickly
If you're starting from zero:
Automate a fixed transfer: Set up a $200–$500 automatic transfer to your HYSA every payday. Automating removes the decision — you don't have to choose to save, it just happens.
Direct deposit splitting: Many employers let you split your direct deposit. Send a fixed amount to savings and the rest to checking. You'll never see the savings portion and won't miss it.
Windfalls go to the fund: Tax refunds, bonuses, birthday money — put them directly into the emergency fund until it's funded. Resist the urge to spend unexpected money.
Sell stuff: Most households have $500–$1,500 of unused stuff. Sell old electronics, furniture, clothes on Facebook Marketplace or eBay. A quick push to fund the initial $1,000 can be done in a weekend.
Once It's Funded
Replenish immediately after using it. The emergency fund is only useful if it's there when you need it — treat replenishment as a bill you pay to yourself.
Don't dip into it for non-emergencies. A planned car maintenance visit is not an emergency. A vacation is not an emergency. Budget for those separately. The emergency fund is for unexpected, unavoidable expenses that would otherwise require debt.
The Mental Math
A $10,000 emergency fund in a HYSA at 4.5% APY earns $450/year — while also protecting you from $10,000 in emergency debt at 20%+ credit card interest.
The "opportunity cost" of keeping money in a HYSA instead of the market is real but small for an amount that might need to be accessed at any time. The insurance value of having that cushion available far outweighs the extra few percent you'd earn in equities.
Build the fund. Keep it separate. Leave it alone until you actually need it.