What is an emergency fund and why do you need one?

Life is full of surprises. Some are great, like finding money in an old coat pocket. Others? Not so much, like an unexpected car repair or medical bill. That’s where an emergency fund comes in. It’s your financial safety net, giving you peace of mind and a buffer between you and debt.

Without a safety net, a single unexpected expense can throw off your entire budget, forcing you to rely on credit cards or loans. By having an emergency fund in place, you can handle life’s surprises without the stress of wondering how you’ll pay for them.

What is an emergency fund?

An emergency fund is a dedicated savings account designed to cover unplanned expenses. Unlike savings for a vacation or new gadget, this fund is strictly for things like medical emergencies, car repairs or urgent home fixes. The goal is to have cash readily available so you don’t have to turn to high-interest debt when the unexpected happens.

How much should an emergency fund be?

A common rule of thumb is to save three to six months’ worth of essential living expenses. But the right amount depends on your lifestyle, job stability and financial commitments.

Here’s a simple way to estimate your ideal emergency fund size:

1. Add up your monthly necessities—rent/mortgage, utilities, groceries, insurance and minimum loan payments.
2. Multiply that by the number of months you want your fund to cover.

For example, if your basic expenses are $2,500 per month and you want a three-month cushion, aim for at least $7,500 in your emergency fund. If your job is less stable or you have dependents, a six-month cushion may be a better target.

If saving that much feels overwhelming, don’t stress. Start small. Even setting aside $500 to $1,000 can make a huge difference when an unexpected bill comes your way.

Where to keep your emergency fund

The best place for your emergency fund is somewhere safe, separate from your everyday spending money and easy to access when needed.

Here are some good options:

• A Bonus Savings account – Earn a great rate while keeping funds available. Bonus Savings rewards you with a higher dividend rate when you meet the easy qualifications, making it a great option to help your money grow faster.
• A money market account – Offers higher returns than a standard savings account, and the more you save, the more you earn with tiered rates.
• A separate savings account at your primary bank or credit union – This keeps your emergency savings separate from everyday expenses, reducing the temptation to spend it.

Avoid putting your emergency fund in investment accounts like stocks or mutual funds. While those can offer higher returns, they come with risk - your money might not be there when you need it.

How to build an emergency fund

Starting an emergency fund might seem daunting, but the key is consistency. Here’s how to get going:

• Open a separate account – A Solarity Bonus Savings account can help you earn a better return while keeping your emergency fund safe and accessible.
• Automate your savings – Set up automatic transfers from your checking account so you’re always making progress. Even $25 per paycheck adds up over time.
• Set a goal – Begin with a small milestone, like $500 or $1,000, then work toward a larger amount over time. Use our savings calculator to help you see what’s possible.
• Cut unnecessary expenses – Look for small ways to save, like skipping takeout once a week or canceling unused subscriptions, and redirect that money into your emergency fund.
• Use windfalls wisely – Tax refunds, bonuses and birthday money are great ways to give your savings a quick boost. Instead of spending it, put a portion into your emergency fund.

When should you use your emergency fund?

Your emergency fund is there to protect you, but it’s important to use it wisely. True emergencies include:

• Unexpected medical expenses
• Car repairs or home fixes that can’t wait
• Sudden job loss or reduced income
• Essential travel (like a last-minute flight for a family emergency)

Try not to dip into your emergency fund for non-essentials like vacations, shopping or entertainment. If you do need to use it, make a plan to rebuild it as soon as possible.

Stay prepared, stay secure

Building an emergency fund takes time, but every step forward strengthens your financial security. Start small, stay consistent and enjoy the peace of mind that comes with knowing you’re ready for whatever life throws your way. If you have questions or need help getting started, we’re here for you. Stop by a Solarity branch or give us a call at 800.347.9222. We’d be happy to help you find the right savings account and create a plan to start building your emergency fund today.