As the calendar resets, making resolutions and setting goals for the upcoming year is one of our most time-honored, annual traditions. Some people focus on improving physical health, while others want to get more organized. And of course, some of the most common resolutions involve finances.
Whether you want to increase your savings account or decrease debt, building an emergency fund is a good place to start. An emergency fund can help you cover the financial surprises that life throws at you.
Having an emergency fund can help you avoid relying on credit cards or high-interest loans, and most importantly, you can be covered financially when you’re faced with life’s unexpected events.
If you want to dedicate your 2025 resolution to building an emergency fund, here is a guide to help you start.
What is an emergency fund?
An emergency fund is a cash reserve for unplanned expenses or financial emergencies, such as:
- Unforeseen medical expenses
- Home appliance repairs or replacements
- Major car repairs
- Unemployment
What are the benefits of having an emergency fund?
Emergency funds create a financial safety net that can help keep you out of debt and financially secure in a time of need without relying on credit cards or high-interest loans. Without these savings, a financial emergency could set you back and have a lasting impact on your financial health. Here are three major benefits of having an emergency fund:
- It helps prevent you from making unwise financial decisions. There are many other ways to access quick cash (like borrowing money), but these options can cost more in the long run. Interest, fees, and penalties are just some of the drawbacks.
- It can help with stress management. One of the biggest contributors to stress is finances, especially when your financial well-being is threatened. Giving yourself a safety net will help you manage these unexpected events without adding money worries to your list.
- It can help improve your spending habits. Building up emergency funds can put more of your money toward savings instead of spending it on a whim.
What is the difference between an emergency fund and a savings fund?
A savings fund is money set aside for a particular goal, such as buying a car or making a down payment on a house. It can also be used for long-term goals, such as retirement savings or college tuition.
An emergency fund is a savings fund set aside to cover unexpected costs in case of an emergency. This can include medical bills, car repairs or financial changes. Emergency funds are typically smaller than savings and should be strictly used for unexpected expenses.
Where should I put my emergency fund?
Since emergencies can strike at any time, it’s recommended you keep a portion of your emergency funds easily accessible. A savings account with a high interest rate is ideal, but this account should be separate from your main bank account. This will keep you from being tempted to dip into your reserves. Cash is another easily accessible option, as long as you keep it in a safe place.
How much should I put in my emergency fund?
The amount you need to have set aside for an emergency fund depends on your life situation and income. The standard recommendation for the amount you should put in your emergency fund is between three to six months’ worth of expenses. Tracking your expenses and creating a budget can give you a realistic idea of what you spend each month. These expenses include rent or mortgage, car bills, insurance, and food. To figure out what your emergency savings goal should be, add up your expenses and multiply them by three or six.
How do I build an emergency fund?
For many people, the thought of setting aside enough money for an emergency fund is intimidating. The good news is there are different strategies to get your emergency savings started, including:
- Setting monthly savings goals. Instead of focusing on one large goal, break it up into smaller and more attainable monthly goals. Reaching these savings milestones can give you positive momentum and encourage you to keep saving for your emergency fund.
- Managing your cash flow. Your cash flow refers to the timing of when your money comes in and goes out. Actively tracking your cash flow will help you see opportunities to adjust your spending and savings.
- Moving money into your savings account automatically. One common way to do this is to set up recurring transfers through your bank. This helps you make consistent contributions to your savings.
- Saving your tax refund. Taking advantage of one-time savings opportunities is an easy way to boost your emergency stash.
- Assessing and adjusting contributions. After a few months, check in to see how much you’ve saved and adjust if needed.
What is considered an emergency?
It’s important to set some guidelines on what constitutes an emergency or unplanned expense when planning your emergency fund. The goal is to use emergency savings only for expenses directly related to unexpected bills, repairs or loss of income. Not every unexpected expense requires emergency funds, so it’s important to remain consistent. Don’t be afraid to use your emergency savings when you need it. However, if you spend what’s in your emergency savings, it’s important to start rebuilding it immediately.
Are you ready to get your emergency savings started?
Let Zions Bank help you achieve your 2025 financial goals. Visit a local Zions Bank branch to speak with a banker today.
