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Emergency Funds 101: Why You Need One and How to Build It This Year

Written by:
Director of Education and Corporate Communications

Many of us set ambitious goals at the start of the year and then quickly put them aside. Roughly, 80% of New Year’s resolutions fail by mid-February.

But unlike that goal of losing the extra holiday weight, building an emergency fund is one resolution you shouldn’t quit on this year.

Why you need an emergency fund

An emergency fund is a safety net that can cushion you from unexpected financial shocks. Life is unpredictable, and unforeseen expenses can arise at any time.

Experts recommend stashing three to six months of income in case of job loss, a medical emergency, or a major home repair. A survey from the Federal Reserve Board shows 4 in 10 Americans don’t that money set aside – making them at risk of taking on high-interest credit card debt.

How to Build Your Emergency Fund in 2025

Not sure how to get started? Here are some practical tips to help you build your emergency fund this year:

1. Set a Clear Goal

Determine your target amount: How much do you normally spend in three to six months? Have a budget and financial plan worth living costs in your emergency fund. To determine what that number is for you, break down your monthly expenses, including rent/mortgage, bills, groceries, etc.

2. Create an account

You don’t want your emergency fund mixed in with your regular savings. Create a separate savings account (find one that earns interest) or open a Money Market Account. These keep your emergency savings easily accessible for when you need them. Use this calculator to gauge how your savings will grow over time.

3. Reduce unnecessary expenses

First, identify areas to cut back. Creating a budget will help determine how much you can save every month. It will also allow you to pinpoint areas to reduce expenses, like subscriptions or entertainment. Then, prioritize essential spending. Focus on your needs over wants to maximize your savings.

4. Automate your savings

Schedule automatic transfers from your checking account to your savings account. This way, you don’t have to consciously consider putting money into your emergency savings account every month.

Direct deposit a portion of your paycheck. Even if it’s just a small amount, ensuring that a portion of your income goes to your emergency savings fund will help you reach your goal.

5. Track your progress

Monitor your savings with budgeting tools or spreadsheets. That way, you can track your progress toward your goal. And don’t forget to celebrate milestones. Rewarding yourself for hard work and dedication helps maintain motivation.

6. Use it only in case of emergency

Once you have emergency money saved, it’s important not to use it unless necessary. Consider if the situation is necessary, urgent, and unexpected before withdrawing money from the account. And once you do take money out, plan to replenish it in the future.

Building an emergency fund may seem daunting, but starting small is key. Even small, consistent contributions can add up over time. By prioritizing your financial well-being and taking proactive steps, you can create a stronger financial future for yourself and your family. Remember, an emergency fund is not a luxury; it’s a necessity.

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