5 Steps to Creating an Emergency Fund

Key Takeaways

• An emergency fund is essential to help cover unexpected expenses and avoid unplanned debt.
• Your emergency fund should be separate from your day-to-day cash and should be easily accessible.
• Starting small and setting up automatic transfers from your paycheck can help in building an emergency fund.

Whether it’s a car breakdown or a leaky roof, unexpected events can quickly take a financial toll. Keeping a reserve of cash on hand in case of an emergency can be useful.

However, many people find it challenging to prioritize emergency savings. A 2024 survey found that only 44% of  Indians could cover a 100,000 emergency from their savings. Furthermore, 63% of respondents say rising inflation is causing them to save less in their emergency funds now.

Saving small amounts today could help you in the future. Here’s how to create and maintain an emergency fund.

What is an emergency fund?

An emergency fund is money you set aside for unexpected expenses, such as medical bills, home repairs or job loss. Your emergency fund should be separate from your day-to-day cash to make sure the funds are there when you need it.

Why do I need an emergency fund?

Having an emergency fund can help you avoid taking on unplanned debt or drawing down savings you’ve put aside for other goals, such as retirement. For example, borrowing or taking money out of your retirement accounts to cover an unexpected expense can be the start of a financial hole that is difficult to dig out of. Even if you have a high income or keep a large running balance in your checking account, you still could benefit from having an emergency fund. 

How much should an emergency fund be?

A good rule of thumb for emergency savings is having enough to cover three to six months’ worth of expenses. The amount you may need can vary depending on if you have a number of dependents (you need more) or a spouse with a job (you may need less), or wealthy parents you can ask for help (again, you’d need less). If you have one income, are self-employed or have a family to support, you may want to save more. 

How do I set up an emergency fund?

For many, building—or maintaining—an emergency fund can feel challenging. Follow these steps to get started:

1. Consider using a basic savings account or money market account

   Ideally it can be linked to your checking account. You want the money accessible in a day, but not in an instant. You want this money to stay safe and liquid. It should not be invested in stocks or even bonds, where it may be subject to market risk.

2. Look for an account that pays you back

   Some high-yield highly liquid sweep-in savings accounts offer an decent annual yield on your deposits.  

3. Start small

   You don’t have to set aside a full six months of expenses up front. Consider setting up automatic transfers from your paycheck until you reach your target. 

4. Only tap the account for true emergencies

   This could include a fender bender, losing your job, a burst pipe or a large medical bill.

5. Replenish the account if you draw on the funds

   Once you’ve made it through an emergency, prioritize rebuilding the account so it will be there the next time you need it.

Even if you don’t incur an unplanned expense for years, you’ll still benefit from knowing you have a comfortable cushion in the event of an unexpected expense.

 

Connect with your MWISE Financial Advisor for help building or maintaining your emergency fund.