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How to Build a Family Emergency Fund

First steps, best practices, and understanding why having a family emergency fund is now more important than ever in the U.S.

by Alexandra Ciuntu
1,185 views
26 min. read

Someone’s savings can go towards any goal imaginable: a dream vacation, a large future purchase, or just having everyone’s Christmas gifts covered. Unlike a savings account, the purpose of an emergency fund is the same for everyone: to help with unforeseen events.

Building a financial safety net is easier said than done when just over half of Americans are able to cover a $1,000 unplanned expense. Today’s political climate and surging inflation only add to the uncertainty and difficulty in starting up an emergency fund – not to mention building one for a family.

If there’s anything we’ve learned from the pandemic, it’s that these precise struggles highlight the need for having an emergency fund in the first place — particularly for those with family to think of. Even if you’re an optimist born under a lucky star, think of it like this: best-case scenario, you never have to use that money. Read on to find out everything you need to know about setting up and building up a family emergency fund.

What’s a family emergency fund and why do I need one?

A family emergency fund does exactly what it says on the tin: it covers a household’s unexpected expenses. This separate savings account is dedicated to unplanned situations and is a fundamental part of most successful financial plans. Essentially, the money set aside can come in handy should you or your spouse lose your job, or help in covering sudden healthcare costs.

Unexpected and sudden events might include:

  • Loss of income/Unemployment
  • Urgent medical treatment
  • Death or disability in the family
  • Boosts in monthly loan installments
  • Necessary home improvements
  • Emergency car repairs

In the wake of the pandemic, more and more Americans see the importance of having an emergency fund. Some lost their job, some lost their home, and some dealt with health complications — and the road to rebuilding oneself after such hits is difficult. Using money from a fund dedicated to emergencies when dealing with the unexpected also reduces the need to use high-interest credit cards or take out loans to cover what’s needed. Basically, by tapping into your own savings, you eliminate further debt — it’s a safety cushion.

What qualifies as an emergency expense?

A family emergency ensures the well-being of the family members in the face of an unforeseen event. It focuses on essential needs and potential must-haves, usually revolving around loss of income or health events, rather than on setting an exact goal and saving up until you reached it (such as a family vacation).

Analyze your family’s monthly expenses and sort them into essential and discretionary. An essential expense might mean different things in different scenarios. For instance, if you’re expecting your first child, the jump from being a couple to having a baby to care for will make you reassess your essential expenses and shift your focus toward early childcare and school.

Even if you don’t have a spouse or children, a family emergency fund can come in handy as a way of providing financial aid to extended family members. For example, if you have aging parents, your emergency fund can aim to cover increasing medical expenses, assisted living costs, and even funeral expenses. Alternatively, a sibling might face an emergency of their own and require financial assistance. These days, emergency funds double as “worst-case-scenario” funds as some might even consider opening one to relocate in case of cultural unrest.

How large should my emergency fund be?

A quick Google search will tell you that the standard amount in an emergency fund should be somewhere between 3 to 9 months’ worth of expenses. First off, figure out how much your family spends each month on necessary living expenses – including food, housing (mortgage, rent), utilities, school costs, car payments and insurance or other transportation costs, student loan payments and other financial obligations.

Once you’ve identified your monthly essentials, you can put a plan in place to contribute part of your discretionary income to an emergency fund. And yes, putting aside nine months’ worth of household expenses is usually hard, not just this year. This requires serious effort and can be very straining on the average family’s budget, so starting with a more modest goal, like saving one month’s worth of expenses, can feel more manageable. Once you reach that goal, you’ll be able to reassess and adjust your contributions until you meet your overall goal. If you are paying off loans or credit cards at the same time, try to prioritize the high-interest debt first.

Building a solid emergency fund takes time, patience, and discipline from the entire family, so discuss a plan with them. Patience is crucial, and having a clear goal and buy-in from everyone makes the journey easier.

How long should I keep saving?

Short answer: however long it takes and makes you comfortable. In an ideal world, saving up for rainy days would be second nature, because life can throw curveballs when least expected — but that’s not always the case and it can be challenging to learn. After you reach your emergency fund goal, maintaining a steady balance becomes more about consistency rather than the amount set aside.

Understandably, many households with emergency funds set prior to the pandemic suddenly became unable to contribute as much or at all compared to pre-COVID times. In times like these, budgeting and prioritization become even more important. For example, the average American household spends about $300 on eating out per month. Small perks such as takeout or daily coffee runs add up and can have an impact on your savings in the long run.

In the end, the best practice for maintaining an emergency fund is a mix of actively cutting specific costs, reigning in a few small luxuries, and allotting whatever possible regularly toward your goal. This includes smaller sums like unexpected refunds or extra change, to larger amounts like bonuses or raises from work.

Expert Questions

If you’re not sure where to start or how to keep an emergency family fund going, we’ve rounded the best tips from top personal finance experts. Read on for quick tips, as well as an answer to the question that’s on everyone’s mind: How to handle the impact of inflation on the family emergency fund?

 

Paul Camp
Paul Camp
Professor and Chair
Department of Finance
Metropolitan State University of Denver
What are some quick tips on saving up for a family emergency fund?
As with any savings goal, this should be part of your ordinary spending plan. Building a fund for emergencies (three to six months’ worth of your ordinary expenses is a good target to start with) is something you should plan for, or it simply won’t happen; you won’t ever get there. Make this part of your routine budget every month, and make sure you put aside a specific amount at the beginning of each month, no matter how small (pay yourself first). If you wait to save what’s leftover at the end of the month, you’ll too often find there isn’t anything. Plan for this to be a long-term project; accumulating enough reserves to cover six months’ worth of expenses is going to take some time. Build in some rewards for yourself along the way as you achieve milestones!

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
It’s best to keep these funds liquid. In the event of an emergency, you want to be able to turn these dollars into cash quickly, and you don’t want to worry about a sudden market downturn at the wrong time costing you precious resources just as an emergency confronts you or your family. So quick and easy access to cash is key, combined with limited, if any, risk to principal. I probably wouldn’t keep the money in a checking account. Psychologically, I think it’s best that if these dollars are being kept for a dedicated purpose, it’s best to keep them in a dedicated account like a savings account set aside for its specific purpose, like emergency use only. You know, “in case of emergency, break glass”. Keeping these dollars in checking makes them hard to separate from funds used for normal, everyday spending. I find that online banks are ideal for this purpose as long as they are FDIC insured. They have an advantage over their brick-and-mortar cousins. Their lower overhead allows them to offer higher interest rates to their depositors that the B&M banks often have trouble matching. Consumers should take advantage of that, provided that the FDIC insurance is still present.

How can one handle the impact of inflation on their family emergency fund?
Not by chasing returns. Returns and risk are positively related, so to match today’s higher inflation with equally high returns, you’d have to place your emergency fund balances at risk in investments expected to return at least 8% annually, if things don’t get any worse, and immediately you’re thinking and talking about stock market returns. That’s very clearly a grossly inappropriate place to hold emergency fund balances because those aren’t liquid; they fail the definition—too much risk to principal. So once your fund is set up, to maintain its purchasing power and protect it from inflation, you’ve got to keep it invested in safe and liquid assets that can be quickly turned into cash without loss of principal. If you cannot invest at a rate equal to inflation, then the difference is going to have to be made up by additional contributions. Emergency funds require constant and ongoing attention, like vegetable gardens. They require a certain amount of tending. You can’t simply plant them and forget them, or they’ll become overgrown with weeds and die.


 

Lisa Frank
Lisa A. C. Frank
Chairperson, Department of Finance
Associate to the Dean, School of Business
Central Connecticut State University
What are some quick tips on saving up for a family emergency fund?
The most efficient way to save for an emergency fund is to “pay yourself first.” The idea behind paying yourself first is to slice off the first percentage of your income (for example, 10% of income) and put it toward emergency fund savings. Each family’s circumstances will determine what percentage of savings makes sense.

If total expenses are not greater than income, then the portion of income that remains after expenses are paid can be directed toward the emergency fund. Families with fluctuating income streams (for example, self-employed business owners) may have to adjust the percentage saved on a month-to-month basis. As a general rule of thumb, savings of 10% to 15% of income make it likely the family will have enough for their emergency fund within a few months. However, don’t be discouraged if you are not able to save that much. Any portion of income helps, and there are strategies for families that do not have any income remaining after expenses.

If total expenses are greater than income, then there are two possible opportunities that will allow the family to continue to save for an emergency. The first is to seek areas in which to reduce expenses, whether temporarily or permanently. By reducing the amount of money spent on unnecessary expenses such as restaurants, subscriptions, or entertainment, for example, families can usually find a minimally disruptive way to curb expenses until the emergency fund goal is met. Once the goal is met, it will be important to continue to find means to bring expenses below income over the long term, to avoid the temptation to tap into the emergency fund in non-emergency situations. The second opportunity to allow for additional emergency fund savings is to earn additional income. There are two main ways to earn additional income: either seek out some part-time side work or sell some items that have been stored in the garage, attic, storage unit or basement that are no longer used or needed. Many families use a combination of these two methods to increase their income and build their emergency fund. Combining these with expense reductions will help a family achieve their emergency fund goal quickly.

Finally, it’s important to stay focused on achieving the savings goal you’ve set for the emergency fund. To stay true to achieving that goal, brainstorm all of the reasons why it’s important to have an emergency fund and hold on to that knowledge. Remind yourself of that ‘why’ as you continue to save. This technique will help you maintain savings momentum, even in months when it seems difficult to put anything aside.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
An emergency fund should remain in a liquid investment since, by definition, an emergency is not something for which we can plan. If there’s an emergency tomorrow, you will need access to your emergency fund tomorrow, not in three months or six months. A tip for emergency fund savings is to house the funds in an account that is separate from all of the other family accounts, possibly in a different institution. The purpose of the separate account is to ensure the funds remain earmarked for emergencies only, yet accessible if and when an emergency does happen.

How can one handle the impact of inflation on their family emergency fund?
This is an interesting question because the existence of inflation, especially in times when inflation is high, makes it that much more important to have an emergency fund. An interest-bearing liquid investment such as a savings account will provide some protection against inflation while the funds are held in that investment account, yet it’s difficult to completely hedge against inflation with liquid investments. Although we know we might not be able to create a complete hedge against inflation, the alternative – not to have an emergency fund or to have too little saved in the emergency fund – is very risky, especially in a highly volatile market. It’s better to have a fully-funded emergency fund despite the inflation risk than to risk not having the funds to cover unexpected expenses and potentially end up in debt should an emergency occur.


 

Stacy Mastrolia
Stacy A. Mastrolia
Associate Professor of Accounting
Freeman College of Management
Bucknell University
What are some quick tips on saving up for a family emergency fund?
A fully-funded emergency fund should equal three to six months of your family’s normal expenses. Once you determine the amount of your emergency fund, you should calculate how long it will take you to save that amount. Having a concrete goal will help you figure out a plan to accomplish it. For example, if you need $15,000 for your emergency fund and want to have it saved in 6 months, you will need to save $2,500 per month to achieve that goal. Accumulating that much money can be a real challenge, so here are a few suggestions.

First (if you don’t already have one), you need to make a budget. Assigning every dollar of your income a “job” will help you see how much you can put towards your emergency fund each month from your paycheck.

Second, you could work a side hustle to increase your income. Does your current job offer overtime? Do you have a hobby or skill that you can use to make some extra money? For example, can you deliver pizzas, groceries, or take-out?

Third, you could cut your expenses. Have you price-shopped your car or house insurance recently? Have you reviewed your debit/credit card statements looking for subscriptions you have that you don’t use? Is there an indulgence you are willing to forgo for a few months to save your emergency fund?

Fourth, you could sell stuff that you don’t want or need anymore. Go through the attic, the garage, and the basement. Do you have extra furniture, tools, dishes, or appliances? You could hold a yard sale or sell items individually through an online marketplace.

Once you know your goal, you can decide how much you are willing to sacrifice – not forever, just for a few months – to save up your family’s emergency fund faster. The deeper you sacrifice, the quicker you will achieve your goal and put a little bit of financial breathing room between your family and a financial disaster.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
The point of your emergency fund is to have money easily available in the event of an emergency, so it should be kept very liquid and easy to access. By “liquid” I mean “not in an investment”. The job of your emergency fund is not to make you money; its job is to be available for you when an emergency happens! A high-interest savings account or a money market account at a local bank or credit union are good choices; you can make a little bit of interest on the balance while still having the funds easy to access. You may also want to keep some of your emergency funds physically in your home; just make sure you keep it far away from the “pizza” money (you don’t want to confuse the two).

How can one handle the impact of inflation on their family emergency fund?
Because you will keep your emergency fund very liquid and accessible, inflation will negatively affect its value. As a result, when inflation is high (like it is now), you should re-estimate the amount you need in your emergency fund to cover three to six months of your family’s expenses. You will probably find that you need to increase your emergency fund a little, but this is far better than discovering you have an inadequate emergency fund when an emergency happens.


 

Cathy McCrary
Cathy McCrary
Assistant Professor of Accounting
Georgia Gwinnett College
School of Business
What are some quick tips on saving up for a family emergency fund?

  • Involve the family in the process by discussing why a family emergency fund is a priority.
  • Encourage everyone’s suggestions about ways to cut back on expenses.
  • Include everyone in the goal-setting process and on progress updates.
  • Although not quick, these steps are likely more effective at getting entire family buy-in and at helping kids to develop financial literacy skills.
  • Once a goal is set, determine the dollar amount necessary to contribute from each pay period, then set-up automated deposits to the family emergency fund.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Ideally, the family emergency fund would be kept in an easily accessible account and, depending on the family’s discipline level, in an account that’s relatively inconvenient to access. This may seem like an oxymoron, but an emergency fund is useless if you can’t access it in an emergency. Likewise, if it’s too convenient to access, then those who are “discipline-challenged” might not have sufficient cash to access when an emergency arises. Striking the right balance of accessibility and inconvenience will vary among families.

Again, to live up to its name, an emergency fund should be liquid (either cash or convertible to cash on demand). Otherwise, you wouldn’t be able to easily access it in an emergency. For some families, a high-yield checking account or money market account with check writing privileges or debit card will work. For other families, it might be wise to house the emergency fund in a savings account that’s tied to a checking account for relatively easy access.

How can one handle the impact of inflation on their family emergency fund?

  • Do your homework to find the type of account that works best for you.
  • Look for an account that pays a relatively high interest rate and meets your family’s specialized needs.
  • Avoid tapping the emergency fund unless there’s truly an emergency, and decide ahead of time what your family’s definition of a “true emergency” is.


 

Mike Morgan
Mike Morgan
Professor of Practice
Department of Finance, Real Estate and Business Law
College of Business & Economic Development
The University of Southern Mississippi
What are some quick tips on saving up for a family emergency fund?
An emergency fund has to be a priority. So many little things pop up that cause us to postpone building up a reserve. Then when we really need it, we get in a bind and have to rely on credit cards or other debt. Trying to stash several thousand dollars in an emergency fund may sound overwhelming, but it is a very important first step in your financial plan. The pros say “pay yourself first,” meaning put something away as soon as the paycheck comes in. If you wait until the end of the month with the intention of putting what is left into a savings account, there is never anything left. Once you have managed to build an emergency fund, you have developed habits that will pay off in other parts of your financial life.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
I suggest a savings account. And even though it might be a bit inconvenient, put it in a savings account that is not at the same bank as your main checking account. Don’t make it too easy to raid the emergency fund for non-emergencies. Shop around for the best interest rate on your savings, including the online banks. But make sure the bank is FDIC insured. This is money that absolutely has to be there when you need it, so avoid the temptation of chasing stock market returns with your savings. Saving and investing are both important but distinctly different parts of your financial plan. Don’t mix them.

How can one handle the impact of inflation on their family emergency fund?
Every six months or so, shop around to make sure you are getting a competitive interest rate on your savings. But even that may not keep up with inflation. If your cost of living has increased by a measurable amount, you might have to accept the reality that the emergency fund you need now is higher than the emergency fund you needed a year ago. If that is the case, prioritize bumping the emergency fund up a little to keep up with inflation.


 

Rebecca Neumann
Rebecca Neumann
Professor and Director of Undergraduate Studies
Department of Economics
University of Wisconsin – Milwaukee
What are some quick tips on saving up for a family emergency fund?
Automatic saving is a great way to build up an emergency fund. Pulling even a small amount from each paycheck and having that automatically transferred into a savings account can be a great way to start building an emergency fund. Earmarking that account as an emergency fund can help families keep the focus on keeping those funds there for emergency purposes. If emergencies arise, then it is important to build that fund back up again. I encourage individuals to check with their bank to set up direct transfers to ensure that saving happens prior to spending! This is part of a good budget. Typically, a budget has been described as a plan for income and spending but I like to think of a budget as a plan for income, saving, and spending. Work the saving right into the budgeted amounts rather than waiting to see what amount is left over to save. In my volunteer work with SecureFutures and in my personal finance class at UW-Milwaukee, we talk about the three parts of a budget as: Income, Saving, Expenses.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
An emergency fund needs to be liquid to be accessible in the event of an emergency. Interest rates are still quite low, but individuals may be able to earn interest on their emergency funds by keeping them in a dedicated savings account or even a money market account. Having the funds separate from those that regularly go toward expenses can be key in maintaining such an account.

How can one handle the impact of inflation on their family emergency fund?
The inflation that we are seeing right now can certainly impact household spending and the choices that households make with their money. Inflation is a sustained increase in prices that may impact different households differently. This makes it even more important to budget so that scarce resources (income) can be put toward necessary expenses for today and saving for the future. As interest rates rise, there may be opportunities to earn more interest on those savings. Keeping some liquid funds in an emergency account likely entails sacrificing some of that additional return (i.e., more liquid accounts pay lower interest). But apportioning funds for different purposes can allow an individual to earn higher interest on less liquid, longer-term savings while keeping some funds available for emergencies.


 

Ron Richter
Ron Richter
Assistant Professor of Professional Practice
Rutgers Business School
Department of Finance & Economics
What are some quick tips on saving up for a family emergency fund?
An emergency fund is especially important, and the first step in the process is to determine how much money you need for your emergency fund; typically three to six months of expenses. Budgeting is particularly important to set up an emergency fund goal, and then you need to plan on how to fund it every month. Without a measurable goal, it will be difficult to establish the emergency fund. Building it should be a priority as it will act as a catalyst to conquering other parts of your financial plan.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Emergency fund assets should be safe and liquid. Therefore, the places to keep these funds are in demand deposit accounts like checking or saving accounts. The funds need to be available to you if needed, so liquidity is essential. You can also utilize a money market mutual fund or high yield savings accounts that have immediate availability if needed.

How can one handle the impact of inflation on their family emergency fund?
The high inflation that we are experiencing makes it exceedingly difficult for an emergency fund to maintain the same purchasing power. With annual inflation hovering around 8% and safe and liquid investments offering approximately 1% annually, keeping up with the rising prices is challenging.

Here are some ways to battle the inflation issue:

  • If you have established a full emergency fund (3-6 months of annual expenses), make additional contributions to it of an additional 10% during these high inflationary times.
  • Review all of your expenses and think about where you can cut to reduce your costs to keep in line with inflation. Most people can find ways to reduce their expenses by changing their behaviors a bit, which can help battle inflation.
  • I Bonds issued by the US Treasury offer great inflation protection and are currently paying 9.62% for the next 6 months; and rates are tied to the Consumer Price Index (CPI-U). Your money is tied up for at least one year, and the most you can invest in I Bonds for a single year is $10,000, in most cases. If you feel you will not need your emergency fund for one year, I Bonds can offer inflation protection.

People may be inclined to take more investment risk with their emergency fund to combat inflation, but remember this additional return potential does come with added market risk. This is a risk that emergency funds should not be taking.


 

Nejat Seyhun
Nejat Seyhun
Jerome B. and Eileen M. York Professor of Business Administration
Professor of Finance
University of Michigan
Stephen M. Ross School of Business
What are some quick tips on saving up for a family emergency fund?
The best way to acquire saving discipline is to save first and then allocate the remainder to life’s necessities and finally to some fun and indulgences. Savings also tend to be easiest by not increasing one’s standard of living when receiving windfall gains or salary increases. By keeping expenditures steady, all of the windfall or salary increase can be devoted to additional savings. A basic goal should be about 20% of one’s gross income.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Emergency funds need to be of sufficient amount, liquid, low or zero risk and readily accessible. Emergency funds should cover anywhere from six months to one year’s worth of living expenses. The precise amount depends on the likelihood of unforeseen events such as loss of one’s job, medical expenses, sudden auto expenses or house repairs. A good place to park this money would be a savings account at a bank or a short-term government bond portfolio, or a high-quality short-term corporate bond portfolio at a mutual fund company.

How can one handle the impact of inflation on their family emergency fund?
While a savings account will not typically provide complete protection against inflation, government bonds and high-quality corporate bonds will do a better job of offering some degree of inflation protection. It is important that emergency funds be invested in short-term low-risk assets. The current yields on savings accounts are still less than 1%, while inflation is running over 8%. Short-term government bonds will offer about 2%, while high-quality short-term corporate bonds can yield around 3% at this time. Nevertheless, the first-order task of the emergency fund is not inflation protection but liquidity and protection from having to sell one’s long-term investments at an inconvenient time, such as in the middle of a deep recession. Consequently, one must be ready to accept some degree of loss of yield in order to gain timely liquidity convenience. My recently published book ‘Personal Finance for Everyday Challenges‘ provides additional strategies to deal with life’s curveballs.


 

Ken Wu
Ken Wu
Associate Professor of Finance
The University of Texas at Tyler
Soules College of Business
What are some quick tips on saving up for a family emergency fund?
Every family should have an emergency fund that can support them for at least 1-3 months (sometimes more) if their income from employment is lost for reasons of illness, disability, etc. Families with only one breadwinner and unstable employment probably need more than that, up to six months. The best advice I can give is to save a little from each paycheck before any of it is spent until the desired amount has been accumulated.

Where should one keep their family emergency fund? Is it best to have it liquid, in a checking account, a savings account, or elsewhere?
Because the emergency fund may be needed at any time, it is best to keep it liquid in something like a savings or money market account where there is no risk of loss. A checking account is fine, too, except that it usually does not pay interest. Because of their inherent risk of loss, stocks and bonds are not appropriate places to hold such funds.

How can one handle the impact of inflation on their family emergency fund?
Because the emergency fund has to be liquid, there is not much one can do to combat the negative effect of inflation. That is because the more liquid a financial asset is, the less return (in the form of interest in this case) it provides.