* This article was originally published on Dec. 5, 2018. It has been updated for 2025.

Before working with FPFoCo, you might not have known what an EFOF is. That’s because we made it up! Well, we made up the acronym at least. It stands for emergency and future opportunities fund.

You’ve heard of an emergency fund, you say, but what’s the future opportunities part about? Allow me to start with the basics as I do my best to answer questions, like …

• What is an emergency fund?

• Why is it important to have an emergency fund?

• How do I start an emergency fund?

• How much should my emergency fund be?

• Where should I put my emergency fund?

• Should I invest my emergency fund?

• When should I use my emergency fund?

I’ll also explain what makes an EFOF — particularly the future opportunities bit — different from your typical emergency fund as I answer each question. But first, here’s a little personal story about the importance of such a fund …

An EFOF Anecdote

A while back, I discovered something no homeowner ever wants to find: My water heater’s tank failed in spectacular fashion. After a frantic phone call or two, by the wee hours of the next morning, I had most of the water collected in a wet vac, the carpet pulled up with the carpet pad exposed, and an industrial-size dehumidifier running. 

“Phew,” I thought, “I got it licked.” Thankfully, by that afternoon, I managed to get the old water heater out and a new one in, up, and running.

Although I got no sleep that night, it’s great because it’s a lesson we can all learn from: the importance of having an EFOF. The average water heater costs $1,327 with installation. Without an EFOF, that could put quite a bit of strain on an individual’s or family’s monthly budget. If I hadn’t had the cash readily available, I’d have been left with cold showers or a higher-than-usual credit card bill accumulating interest. 

Since I knew I could rely on my EFOF to cover the extra cost and pay my credit card in full when the bill came, I didn’t have to deal with either downside on top of a negative situation. The water heater going out and soaking my basement was bad enough … and I still had to replace that carpet. Thank goodness for my EFOF being able to handle that, too!

What Is an Emergency Fund?

My example was all about the emergency fund part of EFOF, and that’s where we’ll begin. As its namesake implies, an emergency fund is a stash of cash that you keep on hand for when you need it. It’s simply cash on hand or in savings that’s readily available.

Once you’re set up on the emergency side of things, you can extend your EFOF beyond emergencies to allow you to cover future opportunities, too.

Why Is It Important to Have an Emergency Fund?

An EFOF is the basis of every financial plan. It’s the table stakes that allows you to build your financial home. From your 401(k) to your IRA, your HSA to your taxable brokerage account, and even your actual home, the thing that comes first is your EFOF. Why? 

If you needed to rely on your 401(k) or IRA in the event of an emergency, you’d likely be paying a 10% tax penalty on top of adding the amount you withdraw to your taxable income for the year. If you needed to take the funds from your HSA, you’d still add the withdrawal amount to your taxable income — but you’d tack on a 20% penalty. With your taxable brokerage account, you’d be subject to capital gains rates — but a withdrawal when the market is down could hurt. And you wouldn’t want to put your homeownership at risk by borrowing against your home unless it was long part of your financial plan.

The way around all of these missteps is to have an emergency fund. The fact is that an emergency reserve is so critical to everyone’s financial plan that it should be savings goal number one in almost all cases across the board. Without an emergency reserve, the options for dealing with an immediate unforeseen $1,000 need — for instance, like a water heater failing — typically involve taking on debt or stopping contributions to other longer-term savings goals. 

Taking on debt can prove costly, of course. Not only does this cost you even more in interest, but stopping contributions to long-term savings goals to pay down debt can also present problems like delaying your timeline toward achieving them. On top of all that, an emergency or opportunity cost is magnified by the loss of several periods of compounding return potential.

How Can You Start an Emergency Fund?

Large or small, the important thing is to begin somewhere. Maybe you drained your EFOF on that last emergency or reduced it from where it should be, and you want to refill it. Or perhaps you’re truly just getting started. So how do you do it?

Start Small

Move the extra cash sitting in your checking to savings. If you don’t have excess cash readily available, take a look at your spending. See where you might be able to trim costs, then turn that into savings. It doesn’t matter if you save a small daily, weekly, or monthly amount. Any savings is going to be more than you had, and it could really help soften the blow when that next emergency rolls around.

Or Go BIG

If you have a large bonus or other inflow headed your way, save it! Use the extra cash to jumpstart your EFOF or give it the boost it needs. 

Whether large or small, beginning or bolstering your EFOF means setting that cash aside — and having it when you need it.

How Much Should an Emergency Fund Be?

Once you’ve started saving, where do you stop? 

The truth is that it is somewhat subjective and can change often, but there are some baseline rules to follow that can help you arrive at a number. Sure, you could head to your RightCapital account and check out the “Liquidity” tab in your “Dashboard,” but you might still be left with questions.

That’s because you could pull the “Liquidity Target” slider all the way up to 12 months and end up with too much of a liquid cash reserve, meaning you have surplus money hanging around doing very little for you. This could be better applied elsewhere in your financial plan.

The baseline starting point for an EFOF is three months of expenses. If you were starting from $0 today and just needed to go somewhere as a goal for your reserve, three months of expenses is a great start. The key here is to focus on your expenses, not your income, when determining your target number.

Three months is a great place for dual-income families with interwoven finances, too. If one breadwinning member of the couple lost their job, they could rely on their spouse or partner — along with that EFOF — to support them while searching for their next career move.

For single individuals and couples who manage money on their own, six months starts to become more reasonable. But what if you’re a single-source-income family and that source of income is variable? For instance, maybe you’re being paid on commission or relying heavily on bonuses. Then, the target multiplier is probably closer to six to eight months of expenses.

Taking into account your family’s income source scenario, the number of mouths to feed, and more, you’ll probably find that you’ll fall somewhere in the three-to-six-month range. However, once you have more than a year’s worth of expenses just hanging out, you’ll also probably find that you’re better served doing something a little more productive with that excess.

Where Should I Put My Emergency Fund?

If you’ve been reading along, you might already know the answer to that question: Savings! But not just any savings account will do. After all, you want that cash to work hard for you while it’s just sitting in your account. Choosing a high-yield savings account can help those dollars fight inflation. This is especially helpful because they’re a multiple of your expenses, which are subject to the same inflation.

If you’re looking for a high-yield savings account, keep an eye out for one offering a competitive rate. Even better: If you can find an account that offers interest paid monthly, you can outearn interest paid quarterly — even on the same invested amount. That’s the beauty of compound interest! 

Bankrate, Nerdwallet, and other sites have “best of” lists of savings accounts. If you prefer the easy button, FPFoCo can offer you access to Flourish Cash. Wherever you look, when searching for the right high-yield savings account for you, some keys to keep an eye out for are:

• FDIC insurance at a bank or NCUA insurance at a credit union
• No minimum balance requirement 
• No minimum necessary to earn interest (or a low amount that suits you)
• No monthly or annual fees

Should I Invest My Emergency Fund?

In general, the answer to this question is no, but there’s a caveat. That’s because, if you’re able to backfill your reserve fairly easily, you can use it for opportunities, too, like funding your Roth IRA or getting a great deal on an item or experience on your goals list.

 

That’s where the investment piece fits in. Say, for example, that you use your EFOF for the opportunity to fund your Roth IRA or HSA during tax season. Should you let the cash that you just contributed sit in cash? You could distribute any contributions you made to your Roth IRA with no taxes or penalties. And you could use your HSA funds for health care expenses in case of an emergency. 

If you don’t have enough in your EFOF for another emergency after such a contribution, the answer might be yes. You may want to keep a portion of your Roth IRA or HSA in cash in this case, but only temporarily. Once you’ve backfilled your EFOF, it’s time to invest that cash and get it working hard for you, too!

When Should I Use My Emergency Fund?

So far, I’ve given you a few examples of when it’s not just ok but actually a good idea to use your EFOF. It should generally be used in circumstances where urgent, unexpected, and necessary expenses would otherwise disrupt your life. While this isn’t an exhaustive list, here are some other times when it’s ok to tap into your EFOF for emergencies …

• You lose your job.

• You have a sudden medical bill.

• Your pet has an unexpected vet bill.

• A family emergency arises.

• Your home needs a major repair or appliance replacement.

• Your car breaks down.

While using your EFOF for opportunities is less straightforward, we’re here to help. If you have a question or want a hand dialing in the right amount for your EFOF so you can handle an emergency with financial confidence — or make the most of the next opportunity that comes your way — just reach out!