How can I prepare for a financial emergency?

Read time: 7 to 8 minutes

You never know what life has in store for you. If your car breaks down, your roof starts leaking, or you lose your job, you'll need savings to help you through.

Read on to learn about:

Emergency savings basics

If a big storm is in the forecast, do you stock up on bread and milk? Do you check the batteries in your flashlights? Building emergency savings isn't that different. You are building up savings to prepare for a big, unexpected expense so you'll be ready when the storm hits.

Think about your expenses 

Think back to your spending over the past year. What costs were entirely unexpected? Perhaps you got a flat tire and needed to replace it. You couldn't have seen that coming. Now, think about the costs you probably could have expected. This could be paying for an oil change or regular car maintenance. These expenses shouldn't come as a surprise.

By being aware of your expenses, you can get a better understanding of what costs are truly unpredictable and could be covered by emergency savings. You can also get an idea what costs may be better managed by budgeting rather than by dipping into your emergency savings.

Know what emergency expenses to prepare for 

You can use your emergency savings to cover:

  • Spending shocks—sudden, pop-up expenses like a chipped windshield, a new water heater, or a trip to the emergency room. Start by building a cash cushion to cover 2 to 4 weeks of expenses. For many people, this could be between $1,000 and $2,000. Keep this money separate from the account you use to pay for everyday expenses. This way, you'll know exactly how much you have ready when you need it.

  • Income shocks—longer-term financial weights like an unexpected job loss or reduction of employment income. A good rule of thumb is to save enough to cover 3 to 6 months of living expenses, like rent, food, and utilities.
Avoid the temptation to spend your emergency money on something like a dream vacation or home remodel. Remember: It's only for emergencies.

Where to keep your emergency savings

You want your money to be easy to get to when you need it, but there's better places to stash your cash than under your mattress. Keep it where it's accessible.

Where you keep your money depends on what you're preparing for:

  • Spending shocks. Consider a checking/savings account or money market fund.

  • Income shocks. Consider a brokerage account with flexible investment options. Roth IRAs may also be a good option as contributions can be withdrawn tax-free.*

You can create an emergency savings account with Vanguard.

Important note: Because you might need your money at a moment's notice, avoid investing your emergency savings where you can't get to it easily. You may consider a certificate of deposit a safe investment, but it may not be suitable for your emergency savings. If you need your money before the maturity date, you could incur early withdrawal penalties. IRAs may pose a similar problem. If you're under age 59½ and you need the money, you could incur a 10% federal penalty tax on top of owing income taxes.*

*Withdrawals from a Roth IRA are tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.

Why it pays to be prepared

With so many demands on your time and money, it's tempting to put building emergency savings on the back burner. Before you put it off any longer, consider these benefits:

  • Peace of mind. Your money will be there when you need it. So when an emergency happens, you can focus on recovering from it—instead of dealing with the stress of not knowing how you'll pay for it.

  • Less temptation. Your money is in a separate account, so it could be less tempting to use it for a non-emergency.

  • A smarter choice. You could rack up credit card debt, take out a loan, or use retirement savings. While you may have access to these other options, they may not be the best long-term financial decisions for you.
36% of Americans would have difficulty paying an emergency expense of $400.*
*Source: Federal Reserve's annual Survey of Household Economics and Decisionmaking, 2020.

Strategies for increasing your savings

When you're putting money toward emergency savings, it's helpful to:

  • Set a savings goal. Then budget it into your monthly expenses. Make a plan and stick to it.

  • Consider direct deposit. You may be able to direct money from each paycheck to a separate account that's set up for emergency savings. If it's automatic, you won't forget.

  • Use one-time opportunities. Did you get a bonus at work, or a tax refund? Add it to your savings.

Every little bit helps 

Rome wasn't built in a day. Your account won't be either. Save a little often—like every week or from every paycheck. You'd be surprised how much a little can add up over time. For more info on how much to save, read What's the right emergency savings amount?

Are you currently facing a financial emergency? Read How do I respond to a financial emergency?

Did you take money from your emergency savings? Be sure to work toward replenishing and start adding money back again.
Whenever you invest, there's a chance you could lose the money.
You may want to consult a financial advisor about your own situation.