Establish an Emergency Fund

Simply put, an emergency fund – often referred to as a rainy day fund – is a cash account that is used only in the event of an emergency, to fill critical financial gaps, or meet unexpected expenses.

It is immediate access to cash that allows you to take care of unforeseen circumstances without impacting the money you have committed to saving and investing.

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 A Home for Your Emergency Fund

The account where your emergency fund is maintained should be one that offers the best return possible. If given the choice between two institutions, one that pays .035 percent interest on a savings or checking account; or another that pays .10 percent, all other factors being equal, the choice is obvious. While your current bank might be a good option, do not be afraid to look for alternatives.  

As an example, look to credit unions if you qualify for membership as they typically offer more attractive rates. Because they are not-for-profit organizations, they can take money that might otherwise be spent on things such as high salaries and feed it back to members. Take the time to do your research and identify your best option, keeping in mind that the most important factor is that the account should be easily accessible.

The Emergency Fund Factors

With regards to the question of how much should be maintained in an emergency fund, there are various schools of thought. While some suggest one year’s living expenses, others suggest three, six, or nine months of income, while others might suggest something else entirely. A good friend of mine keeps one year’s expenses in his emergency fund. In most cases, your marital status (theoretically single people should have more as they are reliant on a single income); the number of children in the household, and the level of job security are the primary factors.

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Other factors might be the age of your appliances, the age of your primary vehicle, as well as the age of other items in your household that might need repair or replacement.Ultimately, the amount will vary for everyone as the factors that impact their lives will be entirely different. However, I recommend three months living expenses as a minimum for your emergency fund.

Final Thoughts

Food for thought when determining the level of your emergency fund: while you certainly do not want to end up in a position where your emergency fund runs dry, it should be remembered that the more cash you have sitting in a low return account, the less money that is working for you, utilizing the power of time and compound interest.

How much do you maintain in your emergency fund? How did you arrive at that number?

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.


  1. We are at currently at 3 months for an emergency fund. With thoughts on aiming for 6. We moved the funds from an online savings account to our credit union account (the rate is slightly lower) but we have better access to it in the event we need to use it.

    Curious to know what others would define as emergency. While my wife and I have not discussed what we would use it for, I’ve only considered it in the event of income loss. We’ve had some unexpected car repairs recently however we did not dip into the emergency fund. We moved some things around and tightened up a bit on other things to make it work.

    • For me, the most basic definition of an ’emergency’ would be anything that is not anticipated and is outside of the normal monthly expenses. Like you, I would probably move things around a little to meet an unexpected expense (e.g. car repairs) if possible, vice dipping into the emergency fund. Also like you, our emergency fund is primarily geared toward covering the loss of income. Fortunately, we are both pretty secure in our jobs, hence my belief that in our situation three months of living expenses suffices for an emergency fund. At the end of the day, the primary purpose of an emergency fund is to ensure that when an unexpected expense arises, you can continue to do the things you typically do in normal month and are not in danger of needing to touch money earmarked for savings/investments. Any money that was intended for an investment but is diverted is not using the power of compound interest.

  2. Yes I agree to have EF funds readily available. I like the message when you say it depends on the situation, someone with an older car, might need a higher EF fund balance to replace the car when the time comes. Good Post and keep on saving.

    • I’m a firm believer that there isn’t one ‘correct’ answer with respect to the amount needed in an emergency fund. What is most important is for people to understand the importance of an emergency fund, understand how it fits into their overall financial plan and assess – based on the factors I noted in the post – how much they require in their fund to achieve a level of security.

  3. Our emergency fund has served us well during my recent job loss. We had a 6 month+ saved.

    • A great example of the value of an emergency fund. While I had to go through a couple of brief furloughs in the last three years, I am fortunate in that I have never experienced a job loss. Even with the brief furloughs, having an emergency fund was definitely comforting.

  4. Such good advice, but the thought of a 9-month emergency fund makes me feel like the little engine that could…at the start of his climb to the top of the hill. Slowly but surely!

    • A 9-month emergency fund may not be necessary. Depending on your specific factors (e.g. job security, age of appliances, age of car, etc.) you might be able to get by with less of an emergency fund. At a minimum, I recommend 3-months of living expenses.

    • Kirsten I know what you mean. It seems like such a huge goal, far off & almost impossible. However, something I’ve learned is to “celebrate the small victories.” While dealing with my identity being used by someone else, I learned that the small, apparently insignificant, victories were actually extremely important. Things were so horrible for me financially that I took time to celebrate earning $60 for the day @ the labor hall or having three days worth of meals in the fridge. I rewarded myself by purchasing used DVDs from the pawn shop or going to see a matinée. These small celebrations reminded me that I was on track; getting closer to the ultimate goal. This way the ultimate goal foamy seem as daunting. I hope this helps you in your journey.

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