The importance of building an emergency fund

Last updated: February 19, 2025

Life is full of unexpected events.  Some of them—like job loss, medical emergencies, car repairs, or natural disasters—can result in unforeseen expenses. If you don't have an emergency fund saved up, events like these can shake up your financial stability. 

That’s why it's essential to have a contingency plan in place to prepare for the unexpected. An emergency fund is a financial safety net that enables you to navigate life's financial emergencies without debt or sacrificing long-term financial goals. 

Below, we discuss important aspects of emergency funds, including why it is essential to have one, how to determine the right target amount, and practical tips for achieving your savings goals. 

Why is an emergency fund important?

The importance of having an accessible emergency fund cannot be overstated. It allows you to:

• Remain financially stable in case of job loss
• Cover unexpected medical bills or car repairs
• Prepare for natural disasters or emergencies
• Maintain your standard of living during times of financial stress
• Avoid costly credit card debt or loans
• Strengthen your overall financial health

What is the right amount for an emergency relief fund?

It's important to keep in mind that everyone's financial situation is different. That means what works for someone else might not work for you. However, most money experts suggest having enough saved up to cover three to six months of your living expenses. 

When deciding on the right amount to aim for, consider your current situation and any financial obligations you have. This can include:

• Job stability: You might be comfortable with a smaller emergency fund if you have a very stable job. Conversely, consider a more substantial amount if your job entails frequent contract work or seasonal fluctuations.
• Income sources: Joint households with multiple income streams might require a smaller emergency fund than single-income households.
• Insurance coverage: Your insurance policies, such as health and disability insurance, can impact the necessary funds in an emergency.
• Debt levels: If you have high debt, it may be prudent to prioritize paying off the debt while maintaining a smaller emergency fund.

How to build an emergency fund

Maintaining a financial safety net gives you plenty of advantages. However, what is the most effective way to establish one? 

Whether you’re working full time or aiming to build a student emergency fund, you won't go wrong with the following tips:

Define your goals

Determine how much money you want to save for your emergency fund based on your circumstances. A clear savings goal helps you create a realistic budget and prioritize your spending habits to achieve your target amount. It also helps to keep you focused and motivated during the process, especially when you’re tempted to splurge on non-essentials. 

Open a separate savings account

Open a savings account specifically dedicated to your emergency fund. This helps to remove the temptation to dip into it for non-emergency expenses. Many banks and credit unions offer high-yield savings accounts, which will enable your emergency fund to earn interest over time.

Automate savings

It's always a good idea to set up automatic transfers from your checking account to your emergency fund. This way, you'll be prepared for unexpected expenses without even thinking about it. By automating your savings, you take the stress out of having to remember to save money every month. Instead, you can relax knowing that you're putting money aside for a rainy day.

Allocate a budget

If you want to have emergency cash ready to go, the best way is to make it a regular part of your monthly budget. Just like your rent or mortgage payments are non-negotiable, consider this fund just as important. Over time, you'll have a solid cushion to fall back on if you ever need it. Doing this shows that you're serious about being on top of your finances and being prepared for whatever comes your way.

Look for ways to increase your income

If you're struggling to find extra money for your emergency fund, look for ways to increase your income. This could mean picking up extra shifts, selling items you no longer need, or finding a Side Hustle.

Utilize financial tools

Nowadays, there are many financial tools that can help you figure out how much money you need to save for emergencies. One of these is an emergency fund calculator. You just need to enter your monthly expenses and other financial info, and the calculator will give you an estimate on how much to save. There are also a bunch of apps and websites that can calculate your emergency fund based on your lifestyle, income, and obligations.

Save over time

Don't be discouraged if you can't immediately save three to six months' worth of living expenses. Start by saving a smaller amount and build up incrementally. Even a small emergency fund can provide some semblance of financial security.

Secure your financial future with an emergency fund

With life's uncertainties, having a safety net to fall back on can significantly reduce stress and help you with unexpected expenses. 

In comes the Dave app. With a Goals account, you can create an emergency fund effortlessly. Just decide your target amount and set up recurring deposits to save over time. 

Download Dave through the Apple App Store or Google Play today.

-----

Provided for informational purposes only and should not be relied upon as legal, tax, or financial advice or to indicate the availability or suitability of any product or service to your unique circumstances.

For a complete list of terms and fees for the Goals account see the Dave Goals Deposit Agreement and Disclosures.