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Don’t have an emergency fund? Get one

Shelly  Gigante

Posted on September 16, 2022

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
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Tell you what kind of expenses an emergency fund should cover.

Suggest ways to balance making payments on student loans, credit cards, and retirement plans while establishing a safety net.

Describe what kind of one-time income can be used to help build your emergency fund.

The emergency fund is an important pillar of any financial plan, the safety net that enables you to pay the bills and keep your financial goals on track in the event of a job loss, costly home repair, or sudden illness.

But very few have enough savings set aside to stay afloat in the event of an unexpected or emergency financial need.

More than half (58 percent) of adults in a recent survey by Bankrate indicated they were concerned about the amount they have in emergency savings, up from 44 percent in 2020.1

Roughly 27 percent of households indicated they had enough savings to cover at least three months of expenses, while 22 percent had enough to cover three to five months of expenses. On the other end of the spectrum, however, 28 percent indicated they had some savings set aside, but not enough to cover even three months of expenses and 23 percent reported that they had no emergency savings at all.

“People underestimate how much they need for emergencies and partly because no one has taught them how to save for a rainy day,” said Cynthia Richards-Donald, a financial professional with Premier Wealth Transfer Group in Charlotte, North Carolina. “If you’re used to instant gratification, you’re not going to have any money available when you need to fix your car or you find yourself unemployed.” (Related: 5 financial moves if you lose your job)

Without an emergency fund, she explained, you may be forced to rely on high-interest credit cards, drain your 401(k), or take out a loan to provide for a sudden financial need. That not only creates a cycle of debt but can also negatively impact your long-term financial security.

The Securing a Strong Retirement Act, more commonly called SECURE 2.0, which was signed into law in December 2022, includes a provision that gives more workers access to employer-sponsored emergency savings accounts (ESAs). ESAs enable workers to build an emergency fund via regular post-tax payroll deductions (up to $2,500 per year), which promotes financial wellness and encourages a discipline of saving. Unlike traditional retirement savings accounts, workers do not incur penalties for ESA withdrawals.(Learn more about the new law here).

SECURE 2.0 also permits employees to withdraw up to $1,000 per year prior to age 59-1/2 from their retirement account penalty-free to help cover emergency expenses, providing an added layer of financial flexibility. But borrowers would have to replace those funds within three years before making a new withdrawal. 

How much do you need?

But just how much do you need and how do you save for a rainy day with so many demands on your income?

Conventional wisdom has long held that most households need a minimum of three to six months’ worth of living expenses (not income) tucked away in a liquid, interest-bearing account, such as a money market account or certificate of deposit. But that was before the Great Recession of 2008.

“During the recession, people found themselves unemployed or underemployed for quite some time, so now we advise married couples to have nine months to 12 months' worth of savings. And singles, who don’t have a second income to fall back on, should try to have 12 to 18 months of savings set aside,” said Richards-Donald.

Err on the longer side if your job security is in question.

That figure may be less daunting than you imagine. Richards-Donald stresses that an emergency fund need only cover your fixed monthly expenses, such as your housing, food, and utility bills. (Related: Adjusting your budget when a major expense hits)

“In a financial emergency, you can cancel your cable bill and any other discretionary expense,” she said. “Just look at what it costs to run your household.” (Related: 5 reasons to tap yiour emergency fund)

Your financial professional can help you determine what size safety net is appropriate for you. Personal finance website Nerdwallet also offers a detailed online calculator to help you assess your emergency fund needs.

Building up your savings

If you don’t have enough saved, don’t despair. Once you determine how much you need, you can start making regular contributions to an account and slowly build your emergency fund.

Ultimately, it doesn’t matter how much you can save each month. It’s more important to establish a discipline of savings.

Indeed, to be successful long term, you must make savings a priority and create a budget to keep your spending in check. (Related: Establishing financial goals)

Richards-Donald said to start by paying yourself first, meaning you siphon off money for savings each month before it lands in your checking account. Better yet, take temptation off the table by setting up an automatic deposit from your checking to savings account every pay period.

“I often tell clients to open an account in a credit union or somewhere that you can’t take money out with an ATM card, so it’s more difficult to access the money,” she said. “Even if you save $40 a week, that’s $160 per month. Little by little, you will build up your emergency fund.”

Change spending habits

Small changes to your lifestyle, such as inviting friends over for drinks and board games on Friday night (or teleconference happy hours when social distancing is required) rather than spending money at bars and restaurants can also free up hundreds of dollars of disposable income per month. Or, if you’re married, consider sharing one car until you’ve reached your savings goal.

While you save for a rainy day, just be sure you continue to make payments on any student loans or credit card balances you may owe, while also contributing enough to your retirement plan to get any employer match that may be offered, said Richards-Donald.

Other tips? The National Endowment for Financial Education (NEFE) suggests using new money from bonuses, raises, or tax refunds to funnel extra dollars into your emergency fund. You can also cancel unused gym memberships, start a side hustle, or rent a spare room out in your home for extra bucks.2

Your employer may even be able to help, indirectly. NEFE suggested savers weigh their workplace benefits carefully, especially when searching for a new job. Any money you manage to save on health insurance, life insurance, matching retirement savings, tuition, or transportation reimbursement is money you can use to boost your savings.

“There’s real psychological power in knowing that you have the funds to rely on if you encounter unexpected expenses or a job loss in the future,” NEFE wrote on its website.

Discover more from MassMutual…

Four simple ways to become a super saver

Calculator: How much should I save for retirement?

Need a financial professional? Find one here

The article was originally published in September 2018. It has been updated.


1 Bankrate, “Survey: Majority of US households uneasy with level of emergency savings,” June 23, 2022.

2 National Endowment for Financial Education, “Your Spending Your Savings Your Future.”

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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.