Why You Need an Emergency Savings Fund and How to Build One

Life is full of surprises, and while some bring joy, others can come with unexpected costs. That’s why having an emergency savings fund is essential for financial stability and peace of mind. At Bank of Hawaii, we’re committed to helping you reach your possible by empowering you to handle life’s challenges with confidence. Let’s dive into why this is important and how you can get started today.

Picture this, the brake pads on your car go and you're out $300. You have a cracked tooth and the dentist's bill comes to $500. Your daughter’s soccer team win’s their division championship and you have to buy several interisland plane tickets on short notice.

But building up your emergency fund isn’t just about managing unexpected expenses. It’s also a proactive way to protect your fun fund—for example, the money you’re saving for bigger goals like remodeling your kitchen or taking a milestone vacation. With money in the bank, your budget can handle the ups and downs, while staying on course for what matters most.

What is an emergency fund?

An emergency fund is a savings account that should be used for those truly unforeseen (and costly) events that can create a major financial burden. It's not a source of money to use for planned expenses like college tuition or a down payment on a home.

Sadly, an emergency fund has become elusive for many. According to the Federal Reserve, 46 percent of Americans say they would not be able to cover a $400 emergency.

A cash stash of four to six months of living expenses should get you through most of life's sudden emergencies. When calculating how much you should save, consider all the different things you would need to pay for during a time of hardship: rent, food, utilities, credit card bills, childcare. It all adds up pretty quickly.

Find a good home for your emergency savings

Unlike a retirement fund or college savings, a rainy day fund isn't meant to be invested with the goal of maximizing your interest returns. It should be a very liquid and accessible source of funds, so you can use the cash on very short notice without restrictions or red tape. The best place for an emergency fund is in a saving account at a bank. Because balances of up to $250,000 are federally insured, there's no risk of losing your money, and you'll be able to withdraw money right when you need it.

A savings account will allow your money to earn at least some interest, compared with, for example, a checking account you use on a daily basis. Make sure that you take into account any minimum balance requirements and/or monthly service fees when considering potential savings accounts. For example, federal regulations limit you to six convenient withdrawals per month, meaning you may be charged fees if you make additional withdrawals. If you anticipate needing to make frequent withdrawals from your account, it may be a better idea to set up a checking account and build your balance there.

Make your money work harder

As you compare savings accounts. look for promotions that offer higher interest rates, savings incentives such as bonuses or other benefits. The more you earn, the faster your account balance grows, so make every penny count.

Start building now

Saving up a fund of four to six months' worth of expenses may sound daunting to some. But don't let that big number discourage you. It's natural for it to take a while to amass a fully stocked emergency account. Until then, set smaller goals for yourself such as $500 or $1,000 to gain your saving confidence. Even these smaller sums can get you out of many financial jams and keep you out of debt.

To turbo boost your emergency savings, try these ideas:

Automate it: You know what they say, “Out of sight, out of mind." If you set up automatic monthly transfers from your checking to savings accounts, you'll never miss the money, and you won't have to remember to set aside funds every month. In fact, if you direct deposit your payroll, most employers will allow you to send your pay into multiple accounts, so the money you want to save can go straight into savings, skipping your checking account entirely.

Use your tax refund: Since money from a tax refund is often not built into your normal monthly budget, it can be easier to take that chunk of cash and save it, since you're not relying on it to pay bills. You can even opt to have your refund deposited directly into your savings account.

Sell your stuff: Look around. You probably have several hundred dollars' worth of items around your place that you could convert into emergency savings. And, bonus, your house will end up being a little neater and better organized.

Get a side hustle. Consider lining up gigs in your spare time, such as pet care or tutoring to get a cash infusion.

Of course an emergency fund won't prevent life's mishaps from happening in the first place. But, with a decent amount of cash at your disposal, at least you'll be able to deal with the emergency at hand more easily, instead of worrying how you'll survive financially on top of it.

Taking the first step toward financial security is easier than you think. Opening a savings account dedicated to emergencies is a simple yet impactful way to start building your safety net. Bank of Hawaii is here to help you make your possible—possible—with s competitive savings rates and helpful features to support your goals. Need guidance on where to begin? Explore our financial wellness module on emergency savings, designed to help you create a plan, set realistic goals, and stay on track. With these tools at your fingertips, you’ll have the confidence and resources to prepare for the unexpected and focus on what matters most.