The Price Makers presents: emergency fund rules that will help you reach your financial goals!
Take it from our experts: every financially responsible adult needs to have emergency fund rules. They’re not just a good idea; they are a fundamental pillar of financial health. They’re important because they will get you out of trouble in severe cases, acting as a crucial safety net when life throws its inevitable curveballs. Without one, a minor setback can quickly spiral into a major crisis.
An emergency fund might go by many names—a rainy day fund, a financial cushion, or a contingency fund—but it is fundamentally a must for everyone who wants financial security. Think of it like having a supply of emergency survival food in case of a natural disaster. You hope you never have to use it, but the peace of mind it provides is invaluable. For better or worse, it’s always good to have it, and it acts like a cash cushion against financial catastrophes such as being evicted, facing a massive and unexpected medical bill, being in an accident, or losing your job. It’s the barrier that stands between an unfortunate event and total financial devastation.
If you respect these emergency fund rules, they’ll keep you afloat during rough patches and prevent you from making poor financial decisions under pressure, like taking on high-interest debt or selling investments at a loss. Maybe you were lucky to get through life without any devastating financial impacts, and you didn’t need an emergency fund. That’s fantastic, but don’t let past luck dictate your future security. Take this article as a sign to start building one, because preparedness is a far better strategy than hope.
Are you ready to save? Building this fund is one of the most empowering steps you can take for your financial well-being. Here are some of the most important emergency fund rules you’re going to want to start working on. They’re approved by financial experts, so you know you’ll do the right thing and build a solid foundation for your future. Let’s not keep this intro any longer and start talking about how to save money for the worst-case scenario!
1. The number of months worth of expenses
For many years now, one of the most popular emergency fund rules was that an individual should tuck away the equivalent of three to six months of their expenses into savings. This is the classic benchmark that provides a significant buffer for most common emergencies, like a temporary job loss or a major car repair.
There’s also a different version, saying that it is better to save three to six months’ worth of your income so you can be covered in case something bad happens, like losing your job. The choice between saving based on expenses versus income depends on your financial discipline. Saving based on essential expenses is often easier to achieve, while saving based on income provides a more robust cushion that covers discretionary spending as well.
So, how do you decide what’s right for you? The amount of money someone wants to tuck away depends on their lifestyle choices and what their expenses would be in severe cases. A single person with a stable job might feel comfortable with three months of expenses. However, a freelancer with fluctuating income, a single-income family with children, or someone with chronic health issues should strongly consider aiming for the higher end of the spectrum. While for some, six months’ worth of expenses or income is the sweet spot, others would find eight to 12 months more appropriate for their situation, offering an even greater sense of security.
While it’s important to consider your expenses (bills, rent or mortgage, groceries, car payments, insurance, and minimum debt payments), these emergency fund rules act as guidelines, so don’t feel bad if you can’t save as much as you would want right away. The key is to start somewhere. The task of saving six months of expenses can feel overwhelming, so break it down.
Even a month’s worth of expenses, or a couple of hundred dollars stashed away for emergencies, is better than nothing. Many experts advise starting with a more manageable goal, like a “$1,000 starter emergency fund.” This initial victory can build momentum and confidence. When you have more financial resources, you can add more, but until then, save the amount you can without feeling like you are restricting yourself. The journey of a thousand miles begins with a single step.
Keep reading to discover all these emergency fund rules!
2. Have a saving goal
Even though these emergency fund rules say that you should start saving so that you’re always covered, regardless of any situation, don’t forget to be specific. A vague intention is easily forgotten. If you only tell yourself that you just want to set some money aside, it is not going to last. You need to give your savings a purpose and a target.
Financial experts say that you should give yourself a nominal and realistic savings goal for that special fund. Consider using the S.M.A.R.T. goal framework: Specific, Measurable, Achievable, Relevant, and Time-bound. For instance, instead of “I’ll save more,” a better goal is “I will save $100 from each paycheck for the next five months to reach my $1,000 starter emergency fund goal.” You can write it down and work toward that goal because it’s going to keep you motivated and on track.
When you get close to reaching your goal, you can keep raising it; the key here is that you need a goal. This keeps you accountable, just like with everything else in life. After you hit your starter fund, your next goal could be one full month of living expenses. After that, three months. Celebrating these milestones along the way can make the process feel rewarding rather than like a chore.
If you tell yourself that you want to save $1,000, you’ll be more likely to succeed, as opposed to saying that you just want to tuck some money away in case of something. This tangible number gives you something concrete to work towards. You can track your progress with a simple spreadsheet, a budgeting app, or even a chart taped to your refrigerator. Seeing the balance grow is a powerful visual reinforcement of your hard work.
What’s great about these emergency fund rules is that banks and financial experts can help you with that too. For instance, there are plenty of financial companies and banks that offer free one-on-one consulting sessions with expert advisers who can give you their best tips on how to make your savings goals a priority. They can help you analyze your budget to find areas where you can cut back and redirect money toward your fund, and they can also help you set up automatic transfers.
If you have trouble following these emergency fund rules, check to see if your bank offers this type of service to help you be on the right path. Automating your savings—having a set amount transferred from your checking to your savings account each payday—is one of the most effective strategies. It takes the decision-making out of it and treats your savings goal like any other bill. But don’t forget to read our articles too, because we’re always here if you need any financial help!
3. Liquid money
While I support people who invest and encourage them to do it if they find something they believe in, you should also have some liquid money to make the most of these emergency fund rules. The primary purpose of an emergency fund is not to grow your wealth, but to protect it. Therefore, accessibility and stability are far more important than returns.
Some people prefer to invest their savings, while others like to keep them under the mattress. Whatever you prefer to do, don’t forget that you still need liquid money for an emergency, such as a sudden illness, a layoff, or a car breakdown. “Liquid” means you can access the cash within one to two days with no penalties and, crucially, no risk of losing the principal amount. Money under the mattress is liquid, but it’s not secure and loses value to inflation. Money in the stock market is not a suitable place for an emergency fund because its value can plummet at the exact moment you need it most.
Let’s say that you have six months’ worth of expenses or income saved, but half of that amount is invested. There’s no problem with that, as long as you have a good chunk of cash at your disposal. That cash portion—at least three months of essential expenses—should be your first line of defense. Think of it this way: having to sell stocks during a market downturn to cover a rent payment is a devastating double-whammy. You lock in your investment losses and compound your financial stress.
You should make sure that your savings aren’t at any risk (as they would be in the stock market, for instance). Roth IRAs, low-risk investments, and CDs are all great picks for emergency fund storage, but financial experts also recommend having a savings account for easier access. While a CD (Certificate of Deposit) can offer a better interest rate, your money is typically locked up for a set term, and early withdrawal comes with penalties. Therefore, they might be suitable for the “outer layers” of your fund (e.g., months four through six), but not for the money you might need tomorrow.
Which one of these emergency fund rules do you think is the most important one?
4. High-interest savings account
If you follow these emergency fund rules, you’ll be golden! Even though I said that the money you set aside should be liquid, that doesn’t mean it has to be sitting around doing nothing. You want your money to be safe and accessible, but you can also have it work for you, even if just a little. Keep in mind that inflation isn’t your friend, and when that occurs, the value of your money might decrease. A high-yield savings account helps to counteract that erosion of purchasing power.
With that being said, keep those potential changes in mind and think about how much a scenario like that could affect you. Financial experts recommend keeping those precious savings in a high-yield savings account (or other account) so that you can easily access them when needed and not pay any penalties for using the money before the term. Unlike a standard savings account from a big brick-and-mortar bank that might pay a meager 0.01% interest, a high-yield account, often found at online banks, can offer rates that are significantly higher. This difference can add up to hundreds of dollars in interest over time, essentially free money that bolsters your fund.
Don’t worry if you’re not familiar with online banks; they are typically just as safe as their traditional counterparts. As long as the institution is FDIC-insured (for banks) or NCUA-insured (for credit unions), your deposits are protected up to $250,000. Another hidden benefit of using a separate, online high-yield savings account is that it puts a little distance between your emergency money and your everyday spending money. This “out of sight, out of mind” approach reduces the temptation to dip into it for non-emergencies.
Other than that, look for the best deal available and do your research on banks that are known for offering the highest rates. Websites like Bankrate or NerdWallet often have updated lists of the top-paying accounts. Even if their rates aren’t at their best at the moment, there’s a high chance that the situation will change soon enough, and your money will be ready to earn interest. The goal is to find an account with a competitive rate, no monthly fees, and easy electronic transfer capabilities.
5. Don’t forget your why
Here’s one of the most important emergency fund rules: don’t forget why you started your saving journey in the first place! Some people are very enthusiastic about starting an emergency fund and then completely forget what it’s there for. This fund is strictly for true, unexpected emergencies—things that could derail your financial life if you didn’t have the cash to handle them.
What constitutes a true emergency? Think job loss, medical crises, urgent home repairs (like a broken furnace in winter), or a necessary car repair to get to work. What isn’t an emergency? A last-minute vacation deal, a new television, concert tickets, or a holiday shopping spree. Don’t make the same mistakes many individuals did, because it might compromise your goals. Keep your why in mind so that you’re always on track.
If you completely forget what your purpose is, you might be compelled to spend your money on unnecessary things, and that can become a real problem in case something happens. Your “why” isn’t just about avoiding disaster; it’s about buying freedom and peace of mind. It’s the ability to sleep at night. It’s the power to say “no” to a toxic work environment because you have a cushion. To keep this front and center, try naming your savings account something like “Freedom Fund” or “Peace of Mind.” This simple trick serves as a constant reminder of its true purpose every time you log in.
Set aside some money for different purchases or expenses, such as a potential vacation, home renovations, or retirement funds, but don’t dip into that emergency fund to cover other expenses. A great strategy is to have multiple savings “buckets” or accounts for different goals. This way, when you want to buy something fun, you can pull from your “Vacation Fund,” not your “Emergency Fund.” Don’t forget to be honest with your financial goals, and you’ll be golden!
If you have a hard time following these emergency fund rules, adding some money every week or month to a piggy bank might be helpful. Start small, and then build up from there! Once the piggy bank is full, make a ceremony out of depositing it into your high-yield savings account. This can build a positive emotional connection to the act of saving. Here’s a great piggy bank that will keep you motivated!
Building an emergency fund is a marathon, not a sprint. By setting clear goals, choosing the right account, and always remembering the profound peace of mind it provides, you are taking one of the most significant steps toward lasting financial security. Did you find this article about emergency fund rules helpful? Leave a comment below and let us know what you think, or share your own best tip for saving! If you liked this article and you’d like to read something else from The Price Makers, here’s a fantastic post for you to check out next: These Amazing 9 Coupon Sites Will Save You Hundreds
