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Came here for my HYSA recommendation? Here it is.
Your emergency fund is your #1 financial priority—so let’s talk about why that is, how much you need, and where folks go wrong (not you!).
First, what is an emergency fund?
An emergency fund is at least 3-6 months of living expenses saved in a high-yield savings account (HYSA). This is money that you do not use or touch unless you have a financial emergency.
When should you use an emergency fund?
So, what counts as an “emergency?”
Any unplanned expense that requires a large amount of money. Think:
- Medical bill, like surgery after an accident
- Car repair, like replacing brakes
- Home repair to fix major damage, like a basement flooding or water heater replacement
- Replacing income during a job loss
- Leaving a situation that has become unsafe
- Moving expenses if you’re uprooted unexpectedly
Generally, these will be big one-time expenses unless you lose your job, in which case your emergency fund might replace your income for a short period of time.
You can define “emergency” however you want, but needing to replace the heater during winter is probably a bit more urgent than wallpapering the bathroom.
That said, you don’t need to feel guilty when you DO need to use your emergency fund.
I know I talk a lot about the importance of having one, but it is meant to be used. I don’t want you to get into a situation where you truly need the money but you feel bad about using it.
How much do you need in your emergency fund?
I mentioned at least 3-6 months of living expenses, and right now, I’m recommending as much as six months to a year. Let’s talk about why there is a range and how you can pick an amount that works for you.
Factors to consider:
- How easily can you replace your income?
- Do you have people who depend on you financially?
- How much do you value security?
- How easily can you decrease expenses?
- Do you have a mortgage or other high fixed costs?
- How secure do you feel in your industry and in the economy as a whole?
- What are your other financial priorities?
If you feel confident that you could easily replace your income and are comfortable with having a modest amount saved, then you might choose a lower amount.
If you have high fixed costs and a family to feed, you might give yourself more breathing room.
That said, you might not have much of a choice. If you don’t make a lot of money, even getting to three months of living expenses might be a challenge. I get it, and that’s tough. But I want you to know that every dollar you save matters.
**I’ve recently doubled my recommendation to be six months to a year of expenses in response to the turbulent economic times. Again, do what feels right for you.**
Why do you need an emergency fund?
Building your emergency fund is step #1 for everyone regardless of income or other financial markers because it allows you to pursue your other financial goals with peace of mind.
I don’t just want you rich—I want you to be able to go to sleep at night knowing that you’ll be okay financially no matter what the next day brings.
Money is emotional, and your emergency fund isn’t just a pile of money. It represents:
- Peace of mind
- Security
- Freedom
- Flexibility
Remember, money = options. Your emergency fund might be the tool that allows you to leave a toxic relationship or job or survive a medical disaster.
Where to keep your emergency fund
I recommend keeping your emergency fund in a high-yield savings account. Here’s my pick.
Why?
HYSAs have significantly higher interest rates than traditional savings accounts and keep your money accessible.
While your emergency fund is meant to be “out of sight, out of mind,” to an extent, I love that HYSAs allow you to grow your money through higher interest payments. Even if you only get $5 a month in interest, that’s $5 you wouldn’t have otherwise!
Emergency fund FAQs
- How much do I need?
- At least 3-6 months of living expenses. But right now, six months to a year is ideal (if you can swing it) because the economy is a bit all over the place.
- Which HYSA do you recommend?
- Can you have too much in your emergency fund?
- It’s not wrong per se, but if you have more than a year’s worth of living expenses saved, I would recommend exploring ways to get more out of your money. For example, you might want to invest that extra cash (where there’s an average 7% return from the stock market) IF you’re able to invest that money for the long term.
- What do I do once I use my emergency fund?
- Here’s a resource to help you rebuild your emergency fund.
- Should I pay off debt before I build my emergency fund?
- I recommend starting with your emergency fund, even if you have debt. You’ll inevitably have something come up, and if you have an emergency fund ready, you don’t need to completely deviate from your debt payoff plan when you have an emergency. Plus, folks tell me that the peace of mind is absolutely worth it.
- How often should I reevaluate my emergency fund amount?
- You should do this at least once a year and any time your expenses drastically change. If you buy a house or move to a more expensive city for example, you will likely need to update your amount.
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