12 Do's and Don'ts of Emergency Funds

Many people have taken the important step of setting up an emergency fund—that's a great foundation! Now it's worth considering whether your fund is structured in a way that maximizes its benefits for you.

It's also helpful to reflect on how you're using it. A dedicated emergency fund works best when it's reserved specifically for unexpected situations—things like medical bills, car repairs or sudden job loss. Sometimes the lines can blur between genuine emergencies and exciting opportunities (like that signed basketball from your favorite athlete). Taking a moment to clarify what counts as an emergency in your personal financial plan can help ensure the money is there when you truly need it.

Try these do’s and don’ts for building an emergency fund:

Do’s

• DO open a separate savings account and name it emergency account or something similar. Keep this money out of your everyday checking and savings accounts to avoid dipping into the money for non-emergencies.

• DO set goals. Start by deciding how much you ultimately want in your fund and setting a target date to reach that goal. From there, create a realistic savings plan. Simply divide your target amount by the number of paychecks you'll receive during that timeframe—this tells you exactly how much to set aside from each paycheck to stay on track.

• DO take baby steps. If six months’ worth of expenses seems like way too much to save in a short time period, start smaller. Make a goal of $1,000 or $2,000. Once you reach that, up the ante. You’ll feel good about reaching a goal and watching your emergency fund continue to grow.

• DO add found money into your emergency fund. Boost your account balance by adding your latest bonus or money you received from selling items online. You may even try cutting down on eating out (or some other nonessential item) and add that amount to your emergency fund to reach your goal faster.

• DO replenish what you use. If you have to dip into your emergency fund, maybe for a medical expense or home repair (or something else equally urgent), make a plan to replenish that money as soon as possible.

• DO make sure this account is accessible. You never know when you’ll need this money so it doesn’t make sense to tie it up in something like a certificate account that has time constraints. Research options that offer a better dividend rate than a traditional savings account, like a money market account or high balance savings account—as long as you can access the money at any time without being penalized.

• DO set up automatic payments. Not only is it one less thing to remember, but you don’t have to worry about that money being spent on other things first. If you don’t see it, you can’t spend it!

• DO understand what constitutes an emergency. Job loss or unexpected expenses requiring travel, car repairs, medical or dental procedures. Things like gifts, entertainment, vacations and sporting events don’t qualify.

 

Don’ts

 

• DON’T rely on a high-interest credit card to serve as your emergency fund. Even if you have plenty of available credit, you’ll end up paying more for whatever you buy because of interest. Your emergency fund allows you to pay for something you need right away without paying extra in interest charges.

• DON’T include money you’re using for a vacation in your emergency fund. This is strictly for unexpected necessities. If you have other things you want to save for, like a family vacation, open a separate savings account.

• DON’T use all your money to pay down debt before building an emergency fund. Even if you can only save a small amount, it gives you a cushion to help get through the small bumps in the road without throwing your whole budget off track.

DON’T use your 401(k) contribution. Reallocating some of this money to build your emergency fund can have a huge impact on your retirement savings—especially if your employer matches some or all of your contribution. Add to your emergency fund after you’ve paid into your 401(k).

Building a solid emergency fund takes time and discipline, but the peace of mind it provides is worth the effort. By keeping your fund separate, setting realistic goals and staying clear on what truly counts as an emergency, you're creating a financial safety net that can help you navigate life's unexpected challenges without derailing your long-term plans. Remember, even small steps forward are progress—what matters most is that you're taking action to protect your financial future. Start where you are, stay consistent and watch your emergency fund grow into the reliable resource you can count on when you need it most.