Where to put an emergency fund (2024)

In the midst of skyrocketing inflation and an unpredictable post-pandemic economy, Americans are finding it difficult to build savings. According to the Federal Reserve, nearly a third of adults couldn’t cover a $500 emergency expense with their savings. Most would be forced to pay for emergency expenses with a credit card, which only adds interest costs and makes it harder to bounce back from financial hardship.

Life is far from predictable, and having an emergency fund is critical to ensure you’re prepared for unforeseen expenses or a loss of income. Let’s talk about where to put your emergency fund — plus what a healthy balance looks like and tips for reaching that amount.

What is an emergency fund?

An emergency fund is an earmarked portion of savings that you keep on hand for emergency expenses. Emergency funds should generally cover about three to six months’ worth of living expenses to fall back on in the event your primary source of income is interrupted or falls short of covering an unplanned expense.

Here are a few reasons you might need to dip into an emergency fund:

• Home repairs
• Car repairs
• Medical bills
• Veterinarian bills
• Family emergencies
• Living expenses in case of job loss

Your emergency fund should never be used for:

• Vacations
• Down payment on a home or car
• Luxury purchases
• Wedding costs
• Tuition

The importance of an emergency fund

Emergency funds are incredibly important to ensure you’re always prepared for unforeseen financial roadblocks. Without a designated emergency fund, you may find yourself forced to use credit cards or drain a long-term investment account, both of which can lead to additional fees and penalties.

Credit cards should never be relied on as an emergency fund due to their sky-high interest. On average, you can expect to pay over 20% in interest annually when paying off a credit card balance.

Optimal size of an emergency fund

Experts generally recommend keeping between three and six months’ worth of living expenses in your emergency fund.

When determining how much to put in your emergency fund, it might be helpful to first calculate your average monthly expenses. Tally up your total financial obligations, and look through bank statements to see what you typically spend on necessities. These might include:

• Groceries
• Rent or mortgage obligations
• Utilities
• Phone and internet bills
• Prescription medications
• Car payments
• Other loan payments, such as student debt
• Home and auto insurance premiums

Once you have a good understanding of how much money you’d need to survive without income for a month, multiply this figure by three and then six to get an ideal range for your emergency fund. If you’re a single, healthy adult with few expenses, you can probably get away with savings on the lower end; families with children, pets, a home and multiple vehicles should consider saving a bit more.

Where to put your emergency fund

Checking account

The top priority when deciding where to put your emergency fund is making sure you have easy access to it on short notice. Arijit Roy, head of consumer segment and solutions at U.S. Bank, made the case for choosing the most liquid type of account banks offer.

“Those dollars should likely stay in a checking account,” said Roy. “It’s money that is most easily accessible with the least amount of restrictions on transactions.”

Of course, it’s important not to keep your emergency fund so accessible that you fall into the habit of borrowing from it for unnecessary expenses. Avoid temptation by opening a separate no-fee checking account for your emergency fund and keeping the associated debit card stashed in a safe. Keep in mind that high-yield checking accounts often have monthly requirements such as a minimum number of debit card purchases, which probably isn’t an ideal place to put your emergency savings fund.

Savings account

If you’re concerned about earning interest on your emergency savings, particularly for a larger fund, a savings account can also be a good option. Savings accounts typically offer better returns than checking accounts, particularly high-yield options.

However, there are a couple of things to watch out for when putting emergency funds into a savings account. If you bank online or don’t have a checking account at the same institution, you may face a delay of several days to transfer funds or make a withdrawal. Some savings accounts have a cap on the number of withdrawals you can make per month without incurring fees, and many charge fees if the account falls below a certain balance. Keep these limitations in mind to avoid penalties if and when you need to access your funds.

Other account types

Accounts such as CDs and money market accounts may not be the best place for your emergency fund as they don’t offer the liquidity needed to maintain access to your money. However, these types of accounts can be great additions to your overall savings strategy once you’ve met your emergency fund balance requirements and are ready to tackle additional goals.

“Think about your emergency savings sitting in your checking account as more of a buffer… almost like your insurance policy,” said Roy. “If you’re saving for, let’s say, a holiday or a vacation, think about products like a shorter-term CD, a money market account or a savings account that offers a high yield. There’s actually not been a better time to be a saver in decades.”

Steps to effectively build your fund

1. Set realistic goals. If you’re starting from $0, begin by challenging yourself to set aside just one month of expenses and continue to grow your fund from there.
2. Make saving a habit. Try to make a routine of contributing a portion of every paycheck to your emergency fund until you reach your target balance. Automatic transfers can be a great tool to ensure you’re making regular contributions.
3. Prioritize your emergency fund. Avoid making unnecessary purchases until your emergency fund sits at a healthy balance.
4. Remember that every little bit counts. Even a small contribution is better than nothing.
5. Only use your fund for strict emergencies. If your car breaks down, that’s a great reason to use your emergency fund. A small dent in the side can probably wait.
6. Always replenish your fund. Anytime you need to use your emergency fund, resume contributions until the account returns to its previous balance.