How to build and maintain an emergency fund

By Gina Coletti

In today’s unpredictable world, financial stability is more important than ever. Whether it’s a sudden job loss, an unexpected home repair, or a family emergency, having a robust emergency fund can be the difference between weathering the storm and facing financial hardship. This article explores strategies for building and managing an emergency fund, ensuring you’re prepared for whatever life throws your way.

Why an emergency fund is essential

An emergency savings fund serves as a financial safety net, providing peace of mind and the freedom to act quickly in the face of unexpected expenses. Financial professionals typically recommend keeping six to twelve months of essential living expenses in cash. This fund should be easily accessible—not tied up in investments—so you don’t have to worry about selling assets in a down market.

The importance of liquidity cannot be overstated. Life events such as job loss, illnesses, or major home repairs can arise without warning. Having cash on hand allows you to cover the essentials like food, mortgage, and utilities, without resorting to taking on debt or selling investments at a loss.

How much should you save?

The amount recommended for an emergency fund varies based on your financial situation. For most people, 12 months of essential expenses is ideal, especially if they don’t have ample investments. However, high-net-worth individuals with sizeable investment portfolios may be comfortable with a six-month cushion due to their greater financial flexibility.

To determine your target amount, review your budget and focus on bare-bones essentials (exclude discretionary spending like vacations or luxury items). Calculate the total needed to cover your basic needs for six to twelve months and set this as your emergency fund goal.

Where to keep your emergency fund

Make the most of your emergency fund by housing it in a safe, accessible place that also offers some growth to offset inflation. High-yield savings accounts are a top choice, as they provide liquidity and pay interest on your balance. Certificates of deposit (CDs) can also be considered, but only if they offer a higher rate than savings accounts and a term length that won’t lock up your funds for too long. Always compare rates and consult with a financial advisor to find the best option for your needs.

Because cash is a depreciating asset due to inflation, earning interest—even a modest amount—helps preserve your fund’s value over time.

How to start building your emergency fund from scratch

Building a full emergency fund doesn’t happen overnight, but the good news is it doesn’t have to. Whether you’re starting with nothing or looking to rebuild after a financial setback, the key is to begin with small, sustainable steps and a clear savings goal.

Start by creating a separate savings account specifically for your emergency fund. This helps maintain boundaries between your everyday spending and the money you’re setting aside for unforeseen events. Keeping it out of sight can also help reduce the temptation to use those funds for non-urgent expenses.

Consistency is more important than the amount. Even modest, regular contributions—such as $25 or $50 per month—can add up over time. If possible, automate your savings so that a portion of your paycheck goes directly into the bank account before you have a chance to spend it elsewhere.

Take advantage of any one-time income opportunity to jump-start your fund. Tax refunds, bonuses, or income from selling unused items can provide an early boost and help build momentum. Redirecting these windfalls toward your savings can make a significant difference without impacting your monthly budget.

If finding extra funds feels difficult, consider reviewing your monthly expenses to identify areas where you might cut back, such as unused subscriptions, frequent takeout, or impulse purchases. Redirecting even small savings from these categories can help you build your fund without major lifestyle changes.

Finally, set short-term savings milestones to stay motivated. Reaching your first $500 or one month of essential expenses is an achievement worth acknowledging. From there, you can continue to build steadily, knowing that each contribution strengthens your financial foundation.

Balancing growth and security

While it may be tempting to invest your emergency fund in the stock market for higher returns, financial professionals caution against this approach. The primary purpose of an emergency fund is liquidity and security, not growth. Investing your emergency fund exposes you to market volatility and the risk of having to sell at a loss during a downturn.

Focusing on portfolio diversification is beneficial for your long-term investments, but this does not replace the need for cash in a high-yield savings account for immediate emergencies.

Alternative funding options

If an emergency occurs before you’ve amassed sufficient cash, there are alternative options to consider (though they should be used sparingly). Some credit cards offer a cash advance feature, but this should only be a short-term solution due to high interest rates. Home equity lines of credit are another option, but the interest is only tax-deductible if used for home-related expenses. Relying on these options can be costly, so they are best reserved for situations where no other resources are available.

Mindset shifts for effective emergency fund management

Building an emergency fund requires a mindset shift. Think of liquidity as financial freedom —the ability to solve problems immediately without jeopardizing your long-term financial health. As tempting as it is to seek higher returns, remember that your emergency fund is about security, not speculation. By prioritizing accessibility and stability, you ensure you’re prepared for unexpected challenges.

Be prepared

A well-structured emergency fund is the foundation for financial security. By saving six to twelve months of essential expenses in a high-yield savings account, you can protect yourself from unforeseen events and maintain your financial independence.

Nixon Peabody Trust Company can help you develop a personalized emergency savings strategy to ensure your fund supports your long-term financial well-being. We will take the time to review your budget, set realistic savings goals, and help provide the peace of mind that comes from being prepared.

Frequently Asked Questions

1. What qualifies as an emergency expense?

An emergency expense is an unexpected, necessary cost that impacts your ability to function day-to-day. Common examples include medical bills, car repairs, sudden job loss, or urgent home repairs.

2. How do I start building an emergency fund if I live paycheck to paycheck?

Start small. Set aside a manageable amount each month, even if it’s just $20 or $50. Automate transfers or set up a direct debit to a separate savings account and gradually increase the amount as your financial situation improves.

3. Should I prioritize paying off debt or building an emergency fund first?

Ideally, you should aim to do both—build a small starter emergency fund (e.g., $500 to $1,000) while making minimum debt payments. Once you have that safety net, you can focus more aggressively on paying down debt.

4. How often should I review or adjust my emergency fund?

Review your emergency fund at least once a year or whenever you experience a major life change (new job, move, new family member, etc.). Adjust your target savings amount as your essential expenses evolve.

Gina Coletti
Chief Fiduciary Officer
+1 617.345.1110
gcoletti@nixonpeabody.com