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 help give you (and those around you) peace of mind: Have a solid emergency fund.

Of course, saving thousands of dollars is easier said than done. About 42% of Americans don’t have an emergency fund, and 40% wouldn’t be able to cover an unexpected $1,000 expense with cash or a savings fund. Car repairs, hospital bills, unexpected home repairs, job loss and other emergencies can come with much higher costs than that.

The good news is that it may be easier and quicker to cushion your emergency savings than you might think. Taking small actions now to get your emergency fund in stronger shape can help you feel more protected against the unexpected.

What’s a Good Emergency Fund Amount?

A common rule of thumb suggests that your emergency fund, sometimes called a rainy day fund, should hold three to six months of living expenses. That said, depending on your family and financial situation, your target may be lower—or much higher.

For example, in a dual-income household, some partners feel comfortable aiming for three months’ worth of expenses if they feel comfortable relying on one partner to cover at least some of the bills if the other loses their job. Single-earner families may plan to save closer to six months of expenses in emergency savings.

People with variable income, including many self-employed workers or people working on commission, may find it helpful to set a higher emergency fund target to cushion against lean months. Single parents may also want to plan for a larger amount to fall back on.

That said, if three to six months’ worth of expenses feels way out of reach, any emergency fund is better than none. If you can realistically aim to save one month’s worth of expenses, start there. If you can spare $20 per paycheck, save what you can and let small contributions grow.

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

At the most basic level, emergency funds work 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.

The more obligations you have and people in your household, the more complex your financial situation may be. This is not to say that single or childfree people have it easy—anyone may need to juggle multiple priorities. Parents may be balancing the demands of a mortgage, education (current and future, on multiple timelines), their own retirement, cash reserves and more. Raising a family means planning for multiple people’s financial present and future, and you never know what’ll pop up.

Emergency or unplanned expenses can come up for positive or not-so-great reasons (and often both at once). One day, you get the news that your child’s brilliant violin talent earned them a spot in an orchestra performance trip—and the school would like you to pay your share. The same week, your other child sticks a magnet up their nose and needs a hospital visit.

Once you have a kid (and with every additional child), recalculate your expenses and check if your emergency fund still covers your three to six-month target. Check your savings annually. Kids often add more expenses as they get older (sorry), whether that shows up as higher grocery bills, private school tuition, extracurricular fees and so on. At least diapers eventually go away!

Another difference is that parents may have an incentive to build up their emergency fund cushion fast. Pregnancy comes with a built-in deadline, so you may feel an urge to save more aggressively than people without a major life shift circled on a calendar date.

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. Even if you can only dedicate a modest amount toward savings, it’s okay. The most important thing is to start.

Here are some tips to help you get there:

• Do the math. Common budgeting wisdom says you should aim to save 20% of your monthly income. If saving is a new habit, you might choose another target, like 15%. You can start by multiplying your monthly income by your target percentage to get your savings goal.

• Get a little ‘gross.’ When doing the math, try looking at your gross income rather than your net (the amount you actually take home after taxes). Everyone’s tax situation is different. Starting with your gross income is a way to “pay yourself first” before the government takes a share, and it’ll give you a bigger savings goal—meaning you fill your emergency fund faster.

• Automate it. Setting up transfers from your paycheck to your savings account can help make saving easier and less stressful than revisiting the decision process each month. If you set up overdraft protection (so you don’t get charged a fee), you may feel less nervous about committing to savings because you can get your money back if you need it to pay bills.

• Don’t get intimidated. You may find you naturally adjust your spending once you start making automatic contributions, because you see a lower balance to work with in your account.

• Try an expense challenge. You can try making a budget adjustment into a challenge or a game by setting an aggressive weekly limit. Can you get by with spending $400 a week? Can you trim spending under $300? Try to feel out what expenses are more negotiable when push comes to shove.

• Study yourself for three months. It can be easy to overlook certain expenses, so it can be helpful to frame budgeting as a kind of mindfulness challenge. Try analyzing three months of credit card bills or bank account statements. Sort expenses by type and amount, and look for ways to cut. Eliminating subscription boxes you don’t use, streaming services you no longer watch or convenience splurges (e.g., Amazon, DoorDash, Uber) may be quick ways to realign your budget.

• Brush up your resume. Sometimes, despite your best efforts, the numbers might not add up. Think about fixed and essential household expenses (e.g., childcare, mortgage payments). Estimate the approximate state and federal tax rates that may apply in your situation to help you calculate a rough income target. If there’s a gap between what you earn and what you need to handle expenses, it may be time to ask for a raise or promotion or even consider job hunting to find the income you need.

• Know your priorities. Emergency fund, retirement savings, debt and other priorities may fight for your attention. What’s most pressing will vary from person to person. In some cases, though, building at least a small cash cushion may be high on the list so you’re prepared to handle an emergency without immediately falling into debt.

Where to Keep Your Rainy Day Fund

If emergency funds, vacation money and down payment planning all fall under “savings,” can they grow in a shared account? There may not be a particular financial advantage to separating versus grouping savings, but there may be a psychological advantage in maintaining separate accounts.

The idea behind an emergency fund is that it’s money you don’t touch unless you need it. It can be helpful to keep that money in a separate savings account or even a different bank if it helps you avoid the temptation to dip into the funds for non-emergency reasons (e.g., birthday expenses).

In terms of what type of account to use, you may have a few possible options to consider:

• Cash savings: This is a convenient, liquid resource, which can help you respond quickly when unanticipated expenses arise. A downside is that most bank savings accounts do not offer high interest rates, and may not even keep up with inflation, weakening the spending power of your cash over time.

• Laddered CD: CDs can offer better interest rates than savings accounts, but you may face penalties for taking money out early, and since you often can’t time your emergencies, this can make it harder to access money right when you need it.

• Roth IRA: You can withdraw contributions at any time, for any reason, without penalty (to withdraw earnings without penalty and taxes, you need to meet specific criteria). Roth IRA funds have the potential to earn returns and grow your emergency fund over time. It may take longer than a bank account to access the money in an emergency.

• Credit account: Cash is your best option for emergency money, but in a true emergency you may need to get funds where you can. A HELOC, or home equity line of credit, can be one way to access resources.

• Investments: It’s good to have some liquid funds for emergency expenses. That said, if you have a very stable income and are in good shape with your finances, it may make sense to look into investing as a next step. Investments can lose as well as gain value, so they are riskier than some other accounts, but they may offer higher growth potential.

Overall, it’s a good idea to make sure you have reliable sources of money when you need it. Once you feel you’re in a good place in terms of access to emergency funds, you can talk to a financial professional and determine what savings or investment vehicles are a good fit for your finances and comfort level with risk.

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 the opposite issue can become a problem, too! People can sometimes commit so hard to helping their emergency fund grow that they’re reluctant to pull money out.

If you hit an unexpected bump, don’t worry about taking money from your emergency account—that’s what it’s there for. (Here are the best and worst places to get emergency cash when you find yourself in a bind.) You don’t need to face a hospital bill or job loss to “qualify” to use your savings. Unanticipated expenses can mean replacing your car’s brake pads or hiring a professional to get squirrels out of your attic. Surprises happen all the time, so growing, using and replenishing your emergency fund is part of a normal financial cycle. The purpose of a strong emergency fund is to help you feel prepared for whatever the next surprise may be.

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