By: Chris Fuksman, CFP®
An emergency fund is one of the simplest – and most essential – parts of a sound financial plan. No matter where you are in life, whether that's starting your career or enjoying retirement, an emergency fund can shield you from financial chaos. Life is unpredictable, and with the second half of the year underway, now is a great time to take action, whether you're building your fund from scratch or giving it a much-needed boost.
Why an Emergency Fund Matters
An emergency fund is money set aside to specifically cover unplanned and urgent expenses that come up during everyday life. Without one, there aren't many options available to cover the unexpected. The cost of being financially unprepared is often higher in the long run, especially when it leads to high-interest debt or early withdrawals from savings.
Situations like these can negatively impact your financial plan – but a sudden financial setback does not need to derail your goals. An emergency fund will help you sleep at night and give you peace of mind knowing you are prepared. Once you understand the importance, the next step is figuring out how much you need.
How Much Should You Save?
While the general rule of thumb is to set aside 3 to 6 months' worth of living expenses, the right amount depends on your circumstances. For instance, you may be single with a steady income, part of a dual-income household, or a business owner with variable earnings. Because everyone's situation is different, it can be helpful to ask yourself:
What expenses must be paid no matter what?
How secure is my income or job?
Do I have people who depend on me? Do I have anyone I can depend on?
If you're unsure how much to save, build a budget based on your essential, fixed expenses. The most important thing is to be realistic about what you need. While a large emergency fund can provide comfort, holding too much cash can limit your money's growth and potentially hinder other financial goals.
How To Build (or Replenish) Your Emergency Fund
If you already have some cash set aside, start by auditing your current reserves; you may only need to top off your fund rather than build from scratch. If you're starting from zero, one of the easiest ways to begin is by automating your savings. Set it and forget it; consistency is key!
Just as it's important to be realistic about your emergency fund goal, it's equally important to be honest about how much you can save right now. Starting small is perfectly fine; what matters is building the habit. If saving still feels difficult, take a closer look at your cash flow.
You may need to reduce non-essential expenses like dining out or unused subscriptions. On the flip side, consider opportunities to boost your income, whether through a side hustle, freelance work, or negotiating a raise, to increase your savings potential.
Where to Save
Now that you know how much to save, the last question is where to save. To avoid the temptation of dipping into it, storing the money in a separate account, preferably one that also earns interest, is best. High-Yield Savings Accounts (HYSAs) are especially appealing in today's rate environment. They offer a safe place for your money, protected from market volatility, while earning more interest than a typical checking account.
When choosing a high-yield savings account, consider the following:
FDIC insurance for peace of mind
No monthly fees or minimum balance requirements
Liquidity and ease of access when you need the funds quickly
While your emergency fund should be "out of sight, out of mind" to reduce unnecessary withdrawals, it must still be accessible when life throws a curveball. After all, it's there for emergencies, and using it when needed is the whole point. Don't feel discouraged if you must tap into it. You're still ahead of where you'd be without one. Just focus on replenishing it when the dust settles and stay on track.
Emergencies are a part of life, but they don't have to derail your progress. Start building your fund today, and finish the year with confidence, knowing you're ready for whatever comes your way.
Chris Fuksman is a CERTIFIED FINANCIAL PLANNER® at HIGHLAND Financial Advisors, a Fee-Only fiduciary wealth advisory firm that offers comprehensive financial planning, retirement planning, and investment management. Chris graduated from Providence College with a degree in Business Economics in 2019 and successfully passed the CFP® national exam in 2024. As a Senior Analyst at HIGHLAND Financial Advisors, Chris works on client trading and assists with financial planning research, preparation, and analysis. Chris enjoys volunteering at his local animal rescue, traveling, and watching European soccer in his free time.
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The above article was written with the assistance of artificial intelligence (AI).