Emergency savings—you never know when you might need it

Life’s last-minute money emergencies certainly are not fun—but if there’s anything that makes them a bit less painful, it’s saving for them in advance.

Money emergencies, by definition, are unpredictable and can put your finances in a tailspin if you don’t have extra money available (nor a plan to build that cushion). While saving for a splurge might seem more exciting, putting money away for an emergency helps cover your bases in case something goes wrong.

Emergency savings: the ultimate backup plan

Medical crises, unemployment, an expensive trip to the vet to fix Sparky's torn ACL—when surprise expenses happen (and they will), you’ll breathe easier knowing you have money available to fall back on.

Alyson Klug, Head of National Sales at TD Wealth, says an emergency fund is a necessity, but one that most people in the U.S. lack. “The bulk of Americans can't handle a $400 charge that hits them out of the blue,*” she says. “You’ll feel better knowing you have a cushion.”

A true emergency savings account is something you keep separate from your other savings. Like the name suggests, it’s money that you only tap into in case of emergencies.

How much should I have in my emergency savings account?

The specific amount of money depends on your situation, Klug explains. “Emergency funds are different based upon your age, how much money you make, what kind of job you have, and what your expenses are.”

The standard emergency fund goal is to save 3 to 6 months of your current cost of living or expenses. This time frame is the go-to because it means that if you were unable to bring in any money for that amount of time (like from unemployment), your barebones, everyday expenses would still be covered for up to 6 months.

However, Klug mentions that in some instances, your emergency savings should be 6 to 12 months—especially if you’re in a highly specialized career with limited job openings. “As you get older and you move up the income level, the emergency fund stretches because it could take you much longer to find a suitable position. Keep in mind that when it comes to those “what if” savings, something is better than nothing. Saving for several months at a time is recommended, but if that feels unrealistic or overwhelming, you can set a goal that will likely cover some of the more common expenses—like $500 or $1,000 for car repairs, appliance fixes, etc.—and build from there.

Put the saving wheels in motion

Once you’ve figured out how much you need or want to set aside, get that savings plan working for you:

  • Find the right  savings account Klug recommends a high-yield savings account (one that’s easy to open with automatic transfers) that will accrue higher interest.
  • Prioritize savings as part of your budget: Readjust or build a new budget that helps you meet your savings goal (and sets up a time frame of when that will happen). Choose whether you want to set aside a dollar amount or a percentage of your monthly income each month.
  • Look for opportunities to reach your goals faster: Get a bonus from work? Think of it as "found" money and stash away as much as possible into that "what if" account. Who knows, you may even hit your goal ahead of schedule.
  • Come up with an incentive: Whether it’s a new fishing rod or a sensational meal from your favorite restaurant, have something fun in mind that you can treat yourself to when you eventually meet your savings goal.

Hit that goal—then celebrate a little

“When you do something great, celebrate it!” says Klug. After all, you prioritized saving, you put your financial future first, and you met your goal. Remember that incentive you came up with? You earned it.

The next step is to think about how you can refocus the money that you were previously saving for your emergency fund. If you were putting aside, say, $100 a month or even a smaller weekly amount to reach this goal, what can that money now go towards since your emergency fund, for the time being, is all set?

As many of us have heard before, “prepare for the worst and hope for the best.” An emergency fund does exactly that. You might find creating an emergency stash kind of daunting at first. But in the end, having that extra cushion can bring some welcome peace of mind.

Take your next step with us

  • Let's talk money

    Get tips on budgeting, saving, borrowing and more

  • Small Business Resource Center

    Resources, tools and support for every stage of your business

  • TD Checking Accounts

    Find an account that meets your needs—and has the perks you want

  • TD Savings Accounts

    Whether you're saving for a rainy day or with a goal in mind, start today.

This article is based on information available in February 2021. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.