Posted August 4th, 2023

Preparing for the Unexpected: How Much to Set Aside in an Emergency Fund

Life plans can change at the drop of a hat, so being prepared is essential. Emergency funds can be a shock absorber for life’s bumps, and everyone should set aside an amount that matches their financial capabilities.
Business FX
Emergency fund

Financial emergencies are unpredictable and happen when least expected. Having enough money saved may be useful if something unplanned, like a job loss or illness, occurs. Although Captain Edward Murphy, the inspiration behind the infamous law, knew things would definitely go wrong, he didn’t say anything about how much money to save for an emergency fund.

As the phrase suggests, an “emergency fund” is money for unforeseen circumstances that helps sustain your way of life through a crisis. However, setting aside even a few dollars from each paycheck for an emergency fund can be challenging.

You might be interested in saving some funds for emergencies but still wonder how to get started quickly and easily. If you’re unsure how to manage your personal finance for such an event, this article demonstrates everything you need to know about setting up emergency funds. We’ll cover the following:

  • What is an emergency fund?
  • Differences between an emergency fund and other types of savings
  • Why is an emergency fund important?
  • How much money to save for an emergency fund
  • How to start an emergency fund
  • Where to keep the emergency fund

[If you’re looking for a convenient, trusted, and easy way to transfer money to your emergency fund account or send money back home from the UAE, download Hubpay. It provides free and easy international money transfers with multiple additional services such as bill payments and airtime recharge. You can join for free on Apple and Google Play.]

What is an emergency fund?

An emergency fund is an accessible bank or savings account designated for unforeseen costs or financial hardship. Such a fund provides a safety net that can assist people in unpredictable circumstances and severe life upheavals like job loss, car repairs, or a sharp income decline.

During a major economic crisis such as the infamous COVID-19 lockdown, an emergency fund can be a lifesaver that pays the bills and puts food on the table. According to Forbes Advisor, nearly 40% of people who had emergency funds before the pandemic used their savings during the pandemic.

Additionally, saved money can help when seeking a new career or additional sources of income without having to borrow money from people or rely on credit cards to survive. According to Wells Fargo Bank, the emergency fund should typically provide three to six months’ worth of living expenses and have the following characteristics:


A source that can be quickly accessed in an emergency is required for an emergency fund. Liquid assets, like account receivables, heavily-traded stocks, or funds held in checking accounts, are preferable as they can rapidly transform into cash.

Dedicated only to emergencies

The sole objective of the emergency fund is to cover emergencies and should not be invested in anything else. In this regard, Bloomberg advises against investing emergency funds in the stock market under any circumstances.

Easy to add to

The fund will be depleted during an emergency, but it must be relatively easy to replenish in preparation for future emergencies.

The differences between an emergency fund and other savings

Most people confuse an emergency fund with other savings when researching how to start one. According to Business Insider, emergency funds are usually saved for unplanned expenses. On the other hand, saving funds are created with a specific goal in mind, such as a down payment on a car or a real estate investment.

Here are some primary differences between them:


While other savings, like retirement funds, are intended to help people live comfortably after retirement, an emergency fund provides support during a sudden and unexpected financial storm.


The golden rule is to calculate your living expenses for a month, and then set aside the amount needed to last you for six months.

That way, you can comfortably go through major life changes, knowing that you can sustain your lifestyle for six months, without having an active source of income.


While other savings, such as college funds, can be placed in long-term, higher-risk assets that you can’t easily access, an emergency fund must be readily accessible and typically taken from liquid resources.

Why is an emergency fund important?

There are many advantages to having a savings account set up for unexpected events, including:

Inspiring confidence

According to the most recent Federal Reserve analysis of household well-being, 36% of Americans said they couldn’t cover a $400 emergency in cash. These days, people are most worried about their financial stability, and an emergency fund can be considered a self-funded insurance policy.

Having such a buffer in place can provide you with confidence and peace of mind when facing life’s unexpected challenges, such as medical bills or losing a job.

Putting a halt on debt growth

Suppose you don’t have an emergency fund set up. In this case, you’ll have to borrow money from a bank or credit card to meet emergency needs, which will often include high interest rates.

According to CFPB, the consumer financial protection bureau, people who find it difficult to get back on their feet financially after a setback are less prepared for the next financial disaster. A person's reliance on credit cards and loans can lead to heavy debt that is difficult to eliminate thanks to accumulated interest, and they might use retirement assets or other reserves to help pay for these expenses.

Providing investment protection

Long-term investments are safeguarded by having an emergency reserve, so you don’t have to liquidate them (converted into cash) in a pinch. Additionally, this strategy helps keep the value of the investment stable. When they need money promptly, people often sell their equities and then buy them back at a higher purchase price, reducing their returns.

For example, bonds are long-term investments in the form of fixed-income securities. A $10,000 bond with a face value of 4% returns $400 annual revenue for the bond owner. Let's assume the bond owner lacks cash for some reason and has to sell the bond earlier to someone else. In that case, an emergency fund comes in handy to protect the bond and allow the owner to wait until revenue is collected. Additionally, the interest rate might rise from 4% to 5%, and the owner will have to pay more to buy the same bond again when liquid cash is available.

Having an extra source of funds

The vast majority of people rely on a single source of income rather than various revenue streams. If they unexpectedly lose their work, having an emergency fund will help them get through the tough financial times that might occur.

Making better financial decisions

Being under a lot of pressure due to a sudden emergency might result in a bad financial move, such as selling an investment. Saving money for an unexpected expense might be difficult, but keeping it in a separate account can help prevent impulsive buying.

In addition, being free from financial worries allows you to explore new endeavors, such as starting a business or switching careers.

How much money to save for an emergency fund

Since everyone has distinct requirements and priorities, there is no universally appropriate quantity for an emergency fund. However, as a rule of thumb, saving three months’ worth of living expenses is recommended in an easy-to-access savings account for financial security.

According to HSBC, if your current monthly salary is $2,500, you need to save at least $7,500 as an emergency fund. Even the Ministry of Finance in the UAE recommends aiming for a 3- to 6-month emergency fund. So, to convert HSBC’S recommendations into AED terms, you might want to aim for at least 64,500 AED on the side if your monthly income is around the Dubai average of 21,500 AED.

The following variables should be taken into account when deciding on the ideal size of an emergency fund:


Your income is the most crucial element. If it is consistently high, it allows for greater emergency fund savings. Conversely, the monthly contribution will be less if your earnings are lower.


An emergency fund should cover bills, food, gas, and other essentials for three to six months of living.

Debts and financial obligations

When planning for a financial emergency, it is crucial to consider monthly debt repayments first, such as mortgage payments. and Only once you’ve handled these should you think about adding to your fund.

Personal circumstances

Individual circumstances, like age, marital status, and family size, can lead to various possible outcomes. For example, if you have to contribute to the costs of caring for a dependent, like a child or a sick elderly family member, then this will affect how much money you can contribute to emergencies.

How to start an emergency fund?

The number of months you spend saving for an emergency fund is proportional to the target size of the fund and your financial objectives. Here are some recommendations for starting an emergency fund:

Planning ahead

The first step is determining how much money to save and committing to saving that amount. While most people set out with good intentions and lofty objectives, few manage to establish an emergency fund.

Rome wasn’t built in a day, and neither is an emergency savings fund, so don’t feel discouraged if it takes a while to save up.

Open a separate emergency savings account

It is important to keep emergency funds separate from regular spending money. So, the next step is to open a separate savings account after deciding on a savings goal.

Create a budget

A budget is a practical technique to manage one’s finances and design a strategy for saving up an emergency fund. Finding out how much money is coming in and where it is going is the first step, and a budget can help prioritize spending from there.

The 50/30/20 budgeting method recommends dividing after-tax income between needs, wants, and savings/debt repayment. The basic premise of the 50/30/20 budget is to allocate funds as follows:

50% for ‘needs’

Essential costs like rent, groceries, gas, and electricity fall under this category.

30% for ‘wants’

Expenses such as eating out, going to the movies, and hobbies are examples of things that are nice to have but are not essential for survival.

20% for debt repayment and savings

Savings for retirement, real estate deals, deposit financing, fulfilling a purchase agreement, and paying off any loan amount fall under this category, along with emergency fund contributions.

What you have left of this 20% once you have deducted your debt obligations is what you should contribute to your emergency fund.

Find funds

When first establishing a budget, there may not be a sizable sum left to set aside for an unexpected expense, in which case an additional revenue stream will be required. So, there are useful methods, such as:

  1. Creating saving habits and reducing expenses, including canceling an unused gym membership card, buying in bulk, and eating at home more often.
  2. Planning ahead for large purchases, such as home furnishings, automobiles, and electronics.
  3. Following the 30-day rule. This is a simple method for delaying purchases and making calculated financial decisions. The general principle is to put off making any discretionary purchase for 30 days, allowing you to evaluate whether it is needed or not.
  4. Starting a side hustle, such as writing articles, or social media marketing, to earn extra money. There are many side hustles in Dubai to help generate extra revenue contributing to the emergency funds.

Automate the savings

Once you deposit funds in the savings account, whether in person or online, it is advisable to make frequent, automatic transfers from your salary into the savings account on payday, which minimizes the likelihood of you spending the money.

The FDIC, Federal Deposit Insurance Corporation, advises putting savings on autopilot. Transfer certain amounts of money from the checking account into a savings account on a regular schedule.

You can do this by automating savings deposits using an online banking tool, such as Hubpay App. You can set the deposit amount and leave it all for the application to process regularly.

Don’t over-save

This advice may come as a surprise. Some people put too much of their savings into an emergency fund, which is only meant to be used in the event of a genuine emergency and is likely kept in a liquid investment.

Once you reach your savings target, the next step should be to transfer the contributions to a separate account to start earning interest on your money.

Progress monitoring

Establishing an emergency fund is an ongoing process that requires constant monitoring. It is important to ensure that the deposits are correct and to plan and assess progress by regularly checking the savings balance, such as after each pay period.

Additionally, you must evaluate and adjust the final goals and the previously established budget to ensure that your saving and spending demands align with your current financial situation. Furthermore, it is essential to start replenishing the emergency fund as soon as you have finished using it, so it is always ready for any potential emergency.

Where to keep the emergency fund?

After learning how to start an emergency fund and how much money to save, selecting the best savings account that allows you to access and manage your money is essential. Although it’s tempting to keep your money under a mattress, several other places are more secure.

High-yield savings account

Safe, high-interest savings accounts that do not limit deposits can be opened at a bank or through an online banking app.

Money market account

Money market funds invest in short-term, high-quality, and highly liquid investments to provide investors with low-risk and quick access to their money.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are time deposits offered by financial institutions, such as banks and credit unions. CDs have a fixed period, and there may be penalties for withdrawing money before the term is over. However, they typically offer higher interest rates than savings accounts.

Digital wallets

Keeping your emergency fund stored in a digital wallet instead of a bank account allows quick access to the funds anytime and flexibility in making urgent payments for any reason. Hubpay is one example of a digital wallet where users can store their funds securely and use them when needed to make instant international transfers or payments. No matter how big or small your emergency savings are, you can easily store them in your Hubpay digital wallet and keep adding to them over time.

Additionally, it's easy for expats living in the UAE to send international transfers from Hubpay’s digital wallet to their families worldwide. For example, you can use your emergency fund to send money from the UAE to India or transfer money to Pakistan from the UAE with a simple click.

[To easily transfer regular deposits to your emergency fund account or send money to loved ones back home from the UAE, download the Hubpay app for free on Apple or Google Play stores to enjoy low-cost international money transfers, as well as international bill payments and mobile recharges.]


  • The foundation of any good financial plan is an emergency fund set up specifically for unexpected events.
  • As a general rule, saving three to six months of expenses is recommended in case of an emergency.
  • It is important that an emergency fund can be quickly accessed, liquidated, and replenished in case of a financial crisis.
  • Regular automatic transfers are a great strategy to save up for unexpected expenses.
  • Take baby steps and break the ultimate goal down into manageable chunks.
  • Building up an emergency fund takes careful budgeting that should be regularly reviewed and updated.
  • Keep your savings in a low-interest, yet easily accessible, account if possible.