Emergency Fund: What Families Need to Know

There’s one thing you can do to help secure your family’s future, achieve your own goals and give you (and those around you) peace of mind: Have a solid emergency fund.

Forty-six percent of Americans don’t have $400 in cash to handle an emergency—but car repairs, hospital bills, job loss and other emergencies can cost way more than that.

(Here's what you should know about your emergency fund during the pandemic specifically.)

“Kids are expensive, so families with children really need an emergency fund,” says Shannon McLay, CEO and Founder of the Financial Gym. “I speak from experience: I have a 12-year-old son!”

The good news is that it may be easier to cushion your savings than you might think. In fact, McLay says, the majority of her clients hit their emergency fund goals within the first year of working with her company, usually around eight months.

Saving an emergency fund isn’t only about being protected; it’s about feeling protected. McLay has found that her clients really feel better when they have money in the bank. She says, “We’ve seen it’s actually good for your mental health.”

What’s a Good Emergency Fund Amount?

An emergency fund, sometimes called a rainy day fund, typically constitutes three to six months of living expenses, according to McLay and Certified Financial Planner Sue Chesney of Delegated Planning, LLC.

“Three months might work for dual income earners making similar amounts,” Chesney says. “I recommend closer to six months if you’re a single-earner household, or maybe four months if one spouse earns a lot more than the other. I also look at how stable that income is.”

For example, if someone is self-employed or works on commission, she recommends saving more in the emergency fund. Similarly, if you're a single parent, you'll likely want to have a larger amount to fall back on.

Marguerita Cheng, Certified Financial Planner and CEO of Blue Ocean Global Wealth, goes even further. She recommends six months of living expenses—more if you are self-employed or have variable income.

Emergency Fund Definition: Does It Change When You Have a Family?

“When you don’t have kids or are single . . . life isn’t as complex,” Cheng says. “As homeowners and parents, we have to think about mortgage, education, retirement and cash reserves. Even doing taxes takes more time.”

You never know what’ll pop up. Cheng says, “My son played viola and his bow warped so we had to get a new bow. Maybe your child makes it onto the traveling sports team so suddenly you have to account for that expense.”

Similarly, McLay says, “My son is 12, and he was in the hospital for two days because he had a kidney stone. I had no idea a kid could get a kidney stone. It cost $2,500 when all was said and done, even with insurance.”

At the most basic level, the concept is the same for parents as for non-parents—just save up a certain number of months’ living expenses. Often, the biggest difference will be that the total numbers are higher.

“Once you have a kid, or an additional kid, recalculate your new expenses and make sure you can still cover three to six months,” Chesney says. “And check back annually, because kids get older and more expensive: They eat more, maybe you pay for private school, there are extracurricular activities, and so on. Diapers go away, at least!”

The other difference is that parents have an incentive to build up this cushion fast. “I would advise parents to aggressively save more—even like 20 to 25 percent of their income instead of 15 percent, because you just know your costs will be higher with kids,” McLay says.

How to Save Up an Awesome Emergency Fund

It may sound forbidding to try to save tens of thousands of dollars, but building up a versatile rainy day fund is probably more doable than you think. McLay recalls working with a couple who had four children under age 8, and $10,000 in credit card debt: “They just couldn’t keep up. Together, we really focused on cutting back on expenses; within eight months, they achieved an emergency fund of about $18,000.”

“Even if you can only do a modest amount, it’s OK,” Cheng says. “The most important thing is to start.”

Here are some tips to help you get there:

• Do the math. “We advise clients to save at least 15 percent of their gross monthly income,” McLay says. “If you’re making $50,000 a year, that’s about $4,200 a month. Multiply that by 15 percent and you should be saving about $625 per month.”

• Get a little ‘gross.’ When doing the math, McLay recommends looking at your gross income rather than your net (the amount you actually take home after taxes): “Everyone’s tax situation is different. You want to pay yourself first before you pay the government, and you want to have a bigger savings goal.”

• Automate it. Setting up transfers from your paycheck to your savings account can help make savings automatic and less painful. McLay notes that if you set up overdraft protection (so you don’t get charged a fee), you shouldn’t be nervous about committing to savings because you can get your money back if you need it to pay bills.

• Don’t get intimidated. Living on less isn’t always the struggle it sounds like. McLay says, “A lot of clients naturally start changing their spending after they start making automatic contributions, because there’s less money in their accounts, so they adjust.”

• Try an expense challenge. McLay suggests giving yourself an aggressive weekly budget as a challenge, such as $200 a week or $400 a week if you have two working spouses. Try to feel out what expenses are more negotiable when push comes to shove.

• Study yourself for three months. In McLay’s experience, most clients don’t know where their money is going, so she suggests framing this as a mindfulness challenge. Try analyzing three months of credit card bills or bank account statements. “Download your info to Excel or some other budget program so you can sort by type and amount, and look for ways to cut,” she says. “Especially in NYC, Seamless, Uber and Amazon expenses are easy targets, or subscription boxes you aren’t actually using. A lot comes out in three months.”

• Hustle. Sometimes, despite your best efforts, the numbers might not add up. “At that point,” McLay says, “you might just need to make more money. Think about fixed expenses (like childcare or mortgage payments) and divide by 0.65, which is roughly the tax rate for many people, for the rough monthly income to cover your expenses.” If your expenses are $5,000, this quick calculation says you should make about $92,000 annually to cover your costs. “My clients look at me like I’m crazy, but there are times I’ve said, ‘You’ve got to make $65,000,” and my clients ask for raises and promotions, get a new job, whatever. They just do it.”

• Know your priorities. McLay has worked with families with $20,000 or $30,000 in credit card debt, but she’s had them prioritize building a cash cushion before paying down all of that debt. “If there’s an emergency and you don’t have any savings, you’re just going to get further into credit card debt.”

Where to Keep Your Rainy Day Fund

“People like to count whatever is in the bank account as an ‘emergency fund,’ but I think it should be a separate bucket,” McLay says, “maybe even be in a different bank, so your emergency savings won’t show up when you’re thinking about how much you can spend. Otherwise we tend to dip in for planned vacations and that emergency fund doesn’t get replenished.”

Chesney recommends storing your emergency fund in cash. “You could use a laddered CD now that interest rates are beginning to rise again, but usually we recommend a money market account.” She thinks it’s important for your money to be liquid and available when unanticipated expenses arise.

“If it’s a true emergency," Chesney says, "a Roth IRA is another good option because you can remove your contributions (not your earnings) without facing a penalty. Cash really is best, but if you’re in a bind you could get a HELOC if you own a home, rather than putting your expenses on a credit card.”

If you have very stable income and a good grasp of your expenses, McLay suggests that you might get more out of investing your emergency fund: “There are definitely risks. When you invest, you are taking money off the sofa and putting it on the treadmill, but you’re also taking it from a stable place and putting it on a rollercoaster where it’ll go up and down.”

She recommends making sure you have enough that you will have reliable money to turn to when you need it, before investing the rest of your total emergency fund amount. “I prefer to have at least three months in cash, not invested,” McLay says. “It depends on the client and his or her comfort level. Hopefully you’re adding to this fund all the time, which should balance out market performance and your ability to get your money out when you need it.”

In fact, some families also choose to create a general emergency fund and a separate, kid-specific fund. “Let’s say you’re saving $625 a month,” McLay says. “Maybe you put $425 toward your emergency fund and $200 to kid costs, so you’re not stressed out by the price of hockey or soccer or whatever.”

When to Use Your Emergency Fund

You might think that the most common mistake is for people to break into their emergency funds for vacations or other non-essential expenses, but McLay has actually found that the opposite can be a problem, too: “Clients have emergencies and say, ‘Where should I get the money?’ I’m like, ‘Your emergency fund!’”

Her clients are sometimes reluctant to actually use the money in their rainy-day funds because they like seeing it grow, “but it’s there for surprise expenses,” she says. “An emergency is anything you’re not planning on. These surprises happen all the time, so the only surprise is what type of surprise it is.”

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