How to build an emergency fund because, well, life

Let’s get real: Life’s expensive. There’s rent or your mortgage, gas, groceries, and the big one — insurance, with prices rising by the day. Imagine if, on top of all that, your car breaks down, or a fun day of kayaking turns into ‘There goes my phone.’

Time to call on that emergency fund. Don’t have one? Don’t worry. We’re here with the 411 on emergency savings accounts, including how to start and grow your own.

What is an emergency fund? 

An emergency fund is money you’ve saved for unplanned expenses or financial emergencies. Since these situations are urgent, having immediate access to your emergency savings is important. 

While it might be tempting to hide money under your mattress, it’s safer to use the bank, as funds are FDIC-insured. This means the Federal Deposit Insurance Corporation will reimburse you, in the rare case that your bank fails. (Read more about FDIC insurance.)

We recommend keeping your emergency stash in a dedicated savings account, separate from your regular savings or checking account. That way, you’ll know exactly how much money is available for an emergency versus a specific savings goal. 

Bonus tip: Give the account a name like ‘For Safekeeping’ or ‘Unexpected Expenses’ as a reminder not to dip into it. 

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Why it’s a good idea to have an emergency fund

In short, life happens. Inflation happens. Recessions, job loss, and unplanned expenses happen. If you get hit with a vet or medical bill, you could be looking at thousands of dollars. The same goes for unexpected home repairs. Insurance doesn’t always cover it. Wouldn’t it be nice to be prepared?

An emergency fund is how you prepare. It gives you the financial security to take care of those emergencies, easing your stress levels. With a dedicated emergency savings account, you don’t have to turn to credit cards, loans, or your retirement fund for money, helping you avoid a big setback — like debt. 

How to calculate how much to save for an emergency fund

If you’re asking yourself ‘How much should an emergency fund be?’, the short answer is: It depends on your situation. As a rule of thumb, your savings should cover three months’ worth of expenses — or more. To calculate that, add-up how much (on average) it costs per month for the following living expenses: 

• Monthly rent or mortgage payment 

• Utilities

  • Gas

  • Electric

  • Water

  • Trash

• Telecom 

  • Phone

  • Cable

  • Streaming services

  • Internet 

• Insurance

  • Car

  • Health

  • Home insurance

• Transportation

  • Car premium

  • Gas

  • Public transit

• Debt payments 

  • Credit cards

  • Loans (but not mortgage)

• Groceries

Add those numbers up, then multiply by three (as in three months), and that’s how much money you’ll want to set aside for your emergency fund. If the amount isn’t doable right now, it’s okay. Start small. Even if it’s just $5, you’ll be doing yourself a huge favor. Keep in mind that the ultimate goal is to work your way up to six months’ worth of expenses. 

6 ways to build your emergency savings

Now that you’ve crunched the numbers, let’s learn about the different ways you can build and grow your emergency fund.

Open a high-interest account 

One of the best ways to build your emergency fund is to put it in a high-yield savings account, where you’ll earn compound interest on your emergency savings. In other words, the bank will pay you to keep your cash there. 

How much? It depends on the amount you deposit and the account’s APY (Annual Percentage Yield). For example, let’s say you make a one-time deposit of $1,000 at 3% APY. That deposit would be worth $1,020 after 1 year, $1,040 after 2 years, and so on. The higher the APY, the more money you’ll earn. 

Your other option for storing emergency funds is a money market account — also through the bank. Just like a high-yield savings account, money market funds earn interest. One key difference: Many require a minimum balance to start an account. So, depending on how much money you have saved, you might not be able to open one with a high-interest rate.

Track your savings progress

When you set the intention to regularly check your savings, you’re more likely to reach your emergency savings goal, whether it’s a few dollars a month or hundreds. You can set up automatic account balance notifications to help keep you in the loop.

Saving isn’t just for adults. Kids can use the Greenlight card and app to learn about savings goals, compound interest, and more — while earning up to 5% on Savings.*  

Manage your cash flow 

Cash flow is your income minus expenses and spending, over a specific time period. By tracking your cash flow, you can find opportunities to adjust your spending and saving. For example, you might start to notice that some weeks you have more available money. That’s the perfect time to move some of it into your emergency savings fund.

When calculating cash flow, consider doing the math for three months’ worth of income and expenses, then averaging that number, for accuracy. This is especially important if you freelance or work a gig where your income goes up and down.

Automate your savings

If you’re a fan of ‘set it and forget it,’ you’ll love recurring transfers. Most banks give you the ability to automatically transfer money from your checking account to your savings. You get to decide how much and how often money is moved to your emergency savings account. If your income changes, you can always adjust the settings for recurring transfers. 

Split your paycheck 

Here’s another way to automate savings and avoid overspending: Divide your paycheck between your checking and emergency savings accounts. It’s easy — just ask your employer for a direct deposit form. You’ll have the option to fill in either the percentage of pay you want deposited into each of your bank accounts, or a specific dollar amount. 

Teens can use Greenlight to automate savings, too. The app allows them to deposit their paychecks right into Savings (or Spending wallet) — skipping a trip to the bank. 

One-time opportunities

What’s the most wonderful time of the year? Winter holidays are high on the list, but for many, it’s tax-refund season. You can use it as an opportunity to deposit some of your refund into your emergency savings account. The same goes for any money you find in your birthday card. 

Emergency savings: Check. Now, keep it going.

Now that you know how to start an emergency fund, you’re one step closer to financial security. Ready for more money management tips and tricks? Here are 13 money lessons our parents taught us. Thanks, mom and dad.

*Greenlight Core and Greenlight + Invest families can earn monthly rewards of 2% per annum, Greenlight Max families can earn 3% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. 

Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.