Learn how to rebuild your emergency fund after job loss with practical savings strategies, common mistakes to avoid, and tips for regaining financial confidence.
Quick takeaways
If you’ve ever been unemployed, the moment when you get your next job offer (or maybe more accurately, your first paycheck) is usually a relief. But the relief may not last if you’ve drained your emergency fund during your break from work.
After a job loss, the pressure to “catch up” financially can feel immense—but it’s important to remember that if you’ve drawn down your emergency savings during this time, then everything is going according to plan.
Emergency funds exist to help people get through unexpected events, like job loss, and avoid taking on unplanned debt. Just because you needed to “break the glass” doesn’t necessarily mean you’ve failed financially—it means that you planned ahead and were ready when you needed to be. That can be a win.
Now that you’ve used some of your emergency savings, the next step may be rebuilding. Let’s look at how you can do that while keeping other financial priorities in mind.
A general rule of thumb is that your emergency fund should have enough to cover at least three-to-six-months’ worth of essential expenses—the things you need to live. Housing, food, transportation costs, healthcare expenses, and regular bills (e.g., utilities, insurance, cell phone, internet, etc.) fall into this category. What you consider essential may have changed or increased since you started your savings, so reevaluate your “must-haves” to get a clear idea of how much you’ll need to save.
You may need more than the recommended emergency savings if your household:
- Depends on a single income. Without additional sources of income, you may want to have more of a cushion to fall back on if you find yourself without it unexpectedly.
- Relies on variable income. If your income rises or falls regularly, you may wish to set aside more for your emergency fund to make up for that volatility. If you’re dipping into savings to cover lean months, your reserves should generally be able to absorb that in the case of job loss.
- Has dependents. If you’re providing for one or more dependents, your emergency savings may include their needs as well.
There’s no one-size-fits-all when it comes to emergency savings funds, so it’s important to look closely at your own income and essential expenses and decide on an emergency savings number that’s right for you.
Here’s an example of how much you might save if your monthly essential expenses total $2,000.
- Three-month emergency fund: $6,000
- Six-month emergency fund: $12,000.
No matter where you’re starting from, there are a few options for replenishing your savings. Let’s take a look:
One way to rebuild is to set up automatic transfers to your savings account. For this approach, you decide on an amount to save, and route that amount to your savings account each time you earn a paycheck. This way, you won’t be tempted to spend what you planned to save, and you’ll save a set amount each paycheck.
Pros
- Consistent and easy to maintain. Set it and forget it. Just let the amount you decide on accrue in your savings account on its own.
- Reduces decision fatigue. No need to decide whether and how much to save each month—just make one decision and commit.
- Builds over time. Your savings will gradually tick up with this approach.
Cons
- May feel slow initially. With small amounts automatically withdrawn, it may be a while before you’ve accrued enough to replenish your savings. Requires patience. This savings approach is about playing the long game. Patience is necessary.
Setting your sights on a more easily achievable goal can help you carry your savings momentum forward. If your savings have been totally wiped out, that’s okay. Start by trying to save just $1,000.
Pros
- Builds confidence quickly. Saving your first $1,000 is a great milestone and can help you motivate you to save even more.
- Creates immediate protection against small emergencies. Your mini-emergency fund can help cover smaller emergency expenses that might otherwise tap your income. Think minor car repairs or replacing a laptop.
- Feels more achievable. Saving enough to cover six months can feel like a lofty goal, especially if you’re starting over. Setting your goal at just $1,000 can give you an achievable target to aim for.
Cons
- May not cover larger disruptions. Not having as much in your emergency fund can mean you’ll run out of those resources if a larger expense occurs.
When a tax refund, bonus, cash gift, or side income gives you a sudden influx of cash, that can be a great opportunity to boost your emergency fund.
Pros
- Accelerates rebuilding. Your timeline to your savings goal can shorten significantly with a nice boost from a financial windfall.
- Doesn't require major monthly budget changes. Saving your bonus money means there’s no need to adjust your monthly budget to move toward your savings goals.
Cons
- Windfalls are often unpredictable. The timing and amounts can be hard to predict. If you’re relying on windfalls to build your savings, it’s worth considering other methods.
If you’re juggling multiple savings goals, you can split your savings between them to help you maintain your progress. In this example, you may want to build your emergency savings, pay off outstanding debt, and contribute toward an individual retirement account (IRA).
Here’s a quick example of how you could break down your savings:
- 50% of monthly savings toward emergency savings
- 25% of monthly savings toward debt payoff
- 25% of monthly savings toward IRA contributions
Pros
- Maintains progress across multiple priorities. No need to sacrifice any of your long-term goals, just tackle them in a way that help ensure you continue making progress.
- Reduces feelings of falling behind. Small steps forward are still steps forward, and you won’t necessarily have to sacrifice your progress in one area to achieve your goals in another.
Cons
- Emergency fund may take longer to rebuild. Your emergency savings will build more slowly if some of what you could devote to it goes toward other goals. That’s part of the plan, though, and could be worth it if you decide to take this approach to saving.
Now that you’re committed to building back your savings, where should you keep your money?
A good emergency savings account is typically:
- Easily accessible. You want to be able to access your money right away, should you need to.
- FDIC-insured or NCUA-insured. In the event of a broader economic or financial catastrophe, make sure your savings are protected by keeping your money at a federally insured institution.
- Separate from daily spending accounts. Keeping your savings separate makes it harder for daily spending to slowly deplete what you’ve worked hard to build.
- Protected from market volatility. Putting your savings in cash-based savings accounts rather than investments can help protect it from market ups and downs and reduce risk.
Common account types for emergency funds include:
- High-yield savings accounts
- Money market accounts
Let’s explore these accounts in more detail.
High-yield savings accounts usually offer higher interest rates than regular bank accounts, which can help your savings grow more. You can often find these accounts offered by online banks, credit unions, and some traditional financial institutions.
Why high-yield savings accounts can be a good fit for emergency savings
Benefits
- Easy access to cash when needed. Most high-yield savings accounts allow you to access your money quickly through online transfers, making it available when unexpected expenses arise.
- FDIC- or NCUA-insured protection. Deposits at eligible banks and credit unions are typically insured by the federal government up to applicable limits, helping safeguard your emergency savings.
- Earn interest while maintaining liquidity. Unlike cash kept in a checking account, money in a high-yield savings account can earn interest over time. This can help an emergency fund continue growing while remaining available for unexpected needs.
- Simple to understand and manage. High-yield savings accounts generally work like traditional savings accounts, making them easy to open and use. There are no investment decisions to make or market fluctuations to monitor.
- Typically no risk of losing savings. Because the balance is held in a deposit account rather than invested in the market, you generally do not face the risk of losing money due to market downturns. As long as funds remain within applicable insurance limits and account terms, the money you deposit remains stable.
Potential considerations
- Interest rates can change over time. Interest rates on high-yield savings accounts are variable, so they may increase or decrease based on broader economic conditions or factors outside of your control. Your future rate isn’t guaranteed.
- May not offer immediate cash access like a checking account. Accessing funds often requires transferring money to a checking account, which may take some time depending on the institution.
- Some institutions may limit certain withdrawal methods. Account features and withdrawal options can vary among financial institutions. It's important to understand any transfer, withdrawal, or access restrictions before opening an account.
What is a money market account?
These accounts blend the features of savings and checking accounts. You can get higher interest rates, as well as check-writing and debit card access. These features make your savings easily accessible and can potentially earn similar returns to a high-yield savings account.
Why some savers choose money market accounts
Benefits
- FDIC- or NCUA-insured when offered by a bank or credit union. Like many high-yield savings accounts, money market accounts at federally insured institutions offer added protection if your bank or credit union closes. Coverage is generally available up to applicable insurance limits.
- Potential for competitive interest earnings. Money market accounts typically offer higher interest rates than traditional savings accounts and, in some cases, comparable rates to high-yield savings accounts. This can help emergency savings earn more while remaining relatively accessible.
- Can provide additional flexibility for accessing funds. Some money market accounts offer features such as check-writing privileges, debit card access, or ATM withdrawals, which may make it easier to access emergency savings when needed while still earning interest.
Potential considerations
- Higher minimum balance requirements at some institutions. Some money market accounts require a higher opening deposit or minimum balance than other savings options. Falling below certain balance thresholds may affect account benefits or earnings.
- Interest rates vary by provider. Interest rates can differ significantly between financial institutions and may change over time. Comparing account features and rates can help determine which option best fits your needs.
- Easy access may make some people more likely to spend funds intended for emergencies. Be wary of the temptation to tap into your emergency fund for non-emergency expenses. Keeping emergency savings separate from everyday spending accounts may help maintain the fund’s intended purpose.
Rebuilding your emergency fund after a period of unemployment is a balancing act, not a race. Let’s take a look at some common mistakes people make when trying to build up their savings again.
Mistake 1: Trying to rebuild too fast
Attempting to replace your emergency fund too quickly may require aggressive cuts to everyday spending or other financial priorities, which can make your budget harder to maintain over time. A steady, realistic approach may be more effective for rebuilding savings over the long term.
Mistake 2: Stopping retirement contributions completely
Reducing or pausing your retirement savings could make it harder to stay on track toward your long-term goals. If you do reduce your contribution rate to make progress on rebuilding your emergency fund, try to move it back once your fund is rebuilt. We recommend saving 15% of your eligible pay toward retirement, including any employer match.
Mistake 3: Using credit cards as a backup plan
Relying on credit cards instead of an emergency fund may create additional pressure when unexpected expenses occur. If credit card balances are not paid off quickly, interest charges can accrue and wind up costing you even more.
Mistake 4: Not updating your savings target
Housing costs, insurance premiums, childcare expenses, and other essential bills may be different from what they were before. Reviewing your current expenses can help ensure an emergency savings goal reflects your financial needs today, rather than outdated assumptions.
Using an emergency fund during a period of unemployment isn't a setback; it's exactly what the fund was designed to do. While rebuilding your savings can be daunting, you have multiple ways to approach it, and every step can help you regain financial stability and build greater confidence in the future.
Ready to rebuild?
