Why do you need an emergency fund?

Christine Luken, an author and personal finance blogger, learned the answer to the question, “Why do you need an emergency fund?” the hard way. 

“Before I had an emergency fund, if I had an unexpected car repair or a vet bill, I had two problems,” she says. “The original emergency and a money problem.”

Those challenging experiences led her to the important realization that the unexpected can happen at any time. It’s Murphy’s law, after all: Anything that can go wrong, will go wrong.

Whatever the reason, when costly emergencies arise or life takes an unexpected turn, you’ll likely need a financial cushion to fall back on. 

In this article, you’ll learn how much to keep in your emergency fund, how to manage it through ups and downs and how to rebuild it if used.

An emergency fund (sometimes called a rainy day fund) is cash that’s set aside to cover the cost of unexpected, and often expensive, events. These savings are meant to be used for real, urgent needs—like to pay rent when your income dries up or for an unplanned medical bill. Of all the emergency fund benefits, the biggest is that it allows you to pay for life’s necessities without having to rack up a balance on your credit card, take out a loan or tap into your home’s equity.

An emergency fund is not money for when your skis break or you’re eyeing a new dress for your best friend’s wedding. Knowing when to use your emergency fund is as important as knowing why you need one.

For Luken, the need for an emergency fund became clear when her car’s alternator failed. She had to resort to payday loans to pay to fix it, and that led to credit problems.

“That started a cycle of payday loans that spiraled out of control,” she says. “I ended up bouncing a check to the payday lender.”

Setting up an emergency fund by opening a savings account was a game changer for Luken. If you’re thinking about starting an emergency fund to handle unexpected expenses, consider this: Capital One’s 360 Performance Savings account offers one of the best savings rates in America.

“My emergency fund is like a shock absorber between me and life,” she says. “I still have vet bills and car repairs, but they are less stressful and disruptive because I have the money in savings to cover the cost.”

Consider these four common situations where you may need a safety net and an emergency fund would come in handy:

Your emergency fund is there for you if you lose your primary source of income. “People lose their job unexpectedly and have had to figure it out,” says David Wright, a personal finance blogger. “If they had an emergency fund, they could have cash available to pay their rent, utilities, etc. Without that fund, how would you be able to make ends meet?”

It can also help you continue an upward career trajectory if you happen to lose your job. Your emergency fund grants you the time you need to make a thoughtful career choice and financially prepare for a job transition.

“If you have an emergency fund, you can focus on finding the next job that’s right for you,” Luken says. “If you’re financially desperate, you may feel pressured to take the first position that you’re offered, even if it’s not the best fit.”

Whether it’s an unexpected illness or a major accident, an emergency fund helps you pay for big medical expenses that could otherwise hurt you financially.

Even if you have medical or dental insurance, you could still have to pay for out-of-pocket expenses. In addition to deductibles, some procedures might not be covered or nonessential healthcare might cause you to max out next year’s coverage.

If you’re looking for reasons to have an emergency fund, imagine scrambling to come up with the funds to cover a medical emergency, rather than taking care of yourself. “When you’re not worried about the cost of your medical care,” Luken says, “you can concentrate on getting better.”

Imagine this: You’re sitting down on the couch to watch a movie with a big bowl of popcorn and suddenly your toilet begins overflowing. Not only would that ruin your evening plans, but an expensive visit from the plumber could break your budget. That’s yet another good reason to stockpile some emergency savings.

“While most people have homeowner’s insurance, there are expenses that aren’t covered by insurance,” Wright says. “Even if the expenses are covered, the insurance provider may be slow to pay.”

With an emergency fund, you’ll be able to pay for unforeseen but necessary home repairs—like appliance repair or replacement—without having to charge large sums to your credit card.

“If you did have unexpected expenses and paid for them with your credit card,” Wright says, “your emergency fund will help you pay off that card without incurring any interest expenses.”

Capital One’s 360 Performance Savings account rate is consistently above the national average, helping you earn more over time.

As Luken learned, you’ll want to add car repairs to the list of reasons to have an emergency fund. Having a working car is essential for many people. If you don’t have a car, you might have difficulty making it to work on time or have to default to expensive taxis or ride-hailing services.

With an emergency fund, you’ll be able to help cover the cost of an expensive car repair or accident. Even if your car is insured, you may still have to pay the deductible in the event of an accident. Common car repairs like new brakes, spark plugs or a timing belt could also set you back hundreds of dollars.

“If you don’t have an emergency fund, you might be forced to choose a repair provider who will approve you for payments, rather than the one who has the best overall price and quality,” Wright says. “This alone could save you 15% to 20% if you had the cash to pay for repairs up front.”

So, what is an emergency fund? It’s whatever you need it to be when times get tough. But as you start tapping into it, you might also want to learn some tips for managing it

Emergency funds can help you come up with the money needed in the event of unexpected medical and dental bills, home and auto repairs, and job losses. But they can also cover other unanticipated expenses, like rising costs on everything from food to gas. 

Basically, if you think your short-term checking account isn’t going to cover any essential bills or expenses, such as housing, utilities and food, then you should use your emergency fund. If you’re wondering where to keep your emergency fund, consider high interest rate savings accounts, money market accounts, certificates of deposit (CDs) and individual retirement accounts (IRAs). 

Products and services that aren’t essential, such as TV streaming services or magazine subscriptions, fall into the “want” category. They shouldn’t be paid for with emergency funds.

“You really want to make sure you keep your emergency fund for emergencies that must be addressed right now,” says Jim Wang, founder of a personal finance blog.

If you’re considering when to spend your emergency fund, you should first be actively removing costly nice-to-haves from your life. Not sure what expenses to cut? Sort through your monthly statements and highlight anything that isn’t absolutely required. “While it may be hard to cut some subscriptions, just tell yourself that it’s only temporary and you can sign back up at a later time,” Wang says.

As you decide how to use your emergency fund, Wang advises against dipping into the fund for minor or non-essential expenses with the expectation to rebuild after another paycheck, especially during times of financial hardship.

Here are some other tips for keeping your emergency fund in a healthy place:

When dealing with a financial emergency, it’s only natural to wonder if you should pull from investments, retirement funds or savings accounts not designated for emergencies.

When making this decision, keep in mind the potential implications of pulling from investments for emergencies. If possible, try to keep focused on your long-term investing goals even when you’re using your emergency fund.  

Opting to use your emergency fund instead of dipping into other high-priority, often long-term savings or investment vehicles may allow the accounts to grow over time without disruption.

As you determine when and how to spend your emergency fund, you’ll also want to rework your budget to reflect your new normal, especially if you’ve experienced a change in your income. To extend the life of your emergency fund and determine how to use it more effectively, seek money-saving alternatives or work to earn short-term, supplementary income.

In addition to cutting back on expenses, try to find ways to save money in your daily life. Maybe you can cook at home instead of ordering delivery, or you can finally tame your online impulse buying. If your financial situation gets more severe, you can also seek out community resources, like a local food pantry, to offset essential expenses that may be difficult to cover at the moment.

If you’re employed and have some extra time to spare, consider some ways to make money on the side. A side hustle is a great way to supplement your current income and keep up with minor expenses without having to spend your emergency fund or dip into your savings accounts.

“After you’ve cut your expenses, you can look for ways to earn a little extra income, which may take the form of part-time jobs, like walking dogs or delivering food,” Wang says. “You can also try to find jobs that are strictly online, like being a transcriptionist or virtual assistant. If you’re willing to do a little extra digging, there are plenty of opportunities.”

If you’re faced with having to use your emergency fund, you should be motivated to get it back to its original amount. Refilling an emergency fund is the same approach as to building one, Wang says. Budgeting is one of the most important things you can do. 

Experts say you should aim to put three to six months of expenses into an emergency fund, but you may not be able to set aside that amount within a month.

If your budget has a $100 surplus each month after you’ve cut back on expenses, found money-saving alternatives or explored a part-time job, you can save your first $1,000 in 10 months. During that same time frame, look for ways to cut expenses further so you can reach your goal sooner.

As you’re considering how much you should have in your emergency fund, consider anywhere from three to six to 12 months’ worth of living expenses. This will give you a decent financial cushion in the event of an unforeseen job loss, costly medical bills or home and auto repairs. 

That means if your living expenses run about $3,000 a month, a $10,000 emergency fund would help you cover a little more than three months of your expenses. But if your monthly budget is much larger, you would need to have a larger rainy day fund. 

So, how much should you have in your emergency fund? Take a good look at your monthly expenses, multiply that figure by three (or more) months, and you’ll find your answer.

Luken, who took about a year to build her emergency fund, loves the peace of mind her savings provide.

“I never want to go without one again,” she says. “It helps me sleep better at night knowing I can handle life’s financial ups and downs.”

So, why do you need an emergency fund? 

• To handle unexpected expenses without relying on credit cards or taking on debt. 
• To protect your financial progress when your income drops or an unexpected bill comes up. 
• To give you peace of mind, knowing you have money set aside when life takes an unexpected turn.

Now that you understand what an emergency fund is and why it’s important, it’s time to make the next move: building one for yourself.

Give your emergency fund some serious momentum with a great rate that helps every dollar go further. Start earning more with Capital One’s 360 Performance Savings account, which offers one of the best savings rates in America.