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The power of emergency savings

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April is Financial Literacy Month—and it's a great opportunity to reflect on habits that can help you stay as financially healthy as possible. Having emergency savings is more than just a safety net. It's a cornerstone of financial well-being. Setting aside money for life's unexpected twists and turns can give you several advantages that go far beyond just "staying prepared." Let's explore why establishing an emergency fund is a small but important step toward financial health and increased overall well-being.

Emergency savings can point to better financial health

Paolo Costa points to a circular icon with an umbrella and a coin and a second icon with a credit card and a pile of coins. A bold headline reads “When is $2,000 as powerful as $1 million?”
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How would you rate your financial well-being right now? Recent research has shown that having at least $2,000 in emergency savings is linked to a 21% higher financial well-being score.1 Since having assets of $1 million or more is associated with an 18% higher financial well-being score, the power of a relatively small emergency savings fund can't be ignored. And saving 3–6 months' worth of expenses is also associated with a 13% higher financial well-being score after taking income, debt, and other financial assets into account.2 

When is $2,000 as powerful as $1,000,000?

Our research shows, $2,000 in an emergency fund can be just as powerful as having $1M in assets when it comes to your financial well-being. Think about it: If you’re lost in the desert and fighting heat and thirst, it only takes a small amount of water to keep you going. You could have all the water in the world back home, but you would get immediate relief from a much smaller amount that’s available right then and there. Your emergency fund is like water in the desert. Just $2,000 can give you a buffer against many of the things life can throw at you.

The hidden benefits: Time and productivity

One of the most important things we've learned from years of research is that the weight of financial stress can limit people's performance in the workplace. People without emergency savings reportedly spend about 6 hours distracted by financial stress during the average work week, while those with savings averaged fewer than 2 hours of distraction.2

Investors without emergency savings also spend nearly double the time—about 7 hours per week—managing their finances, compared with those who have at least $2,000 in savings.2

The takeaway? Having adequate emergency savings can unlock more freedom and productivity at work and at home.

3 simple habits that can boost your financial security

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Deciding where to put your next dollar is no small decision, especially when you're juggling competing financial priorities. Here's a simple guide:

Pay down high-interest debt.

Tackle that credit card with a 20% annual interest rate (or any other source of high-interest debt). High-interest debt can quickly spiral out of control, making it harder to save, invest, or pay off the debt.

Make the most of your employer match.

Make sure you're taking advantage of your full employer match for your retirement savings plan. It's an easy way to avoid leaving money on the table.

Build emergency savings.

Building up at least $2,000 in an emergency fund should be among your top financial priorities.3 It can provide a sense of immediate financial security and reduce stress, allowing you to focus on other financial goals.

Getting a handle on your competing financial priorities can make your financial life feel a lot more manageable. That can translate to less stress for you—and a greater sense of well-being.

3 things financially secure people have in common

So, what are 3 things financially secure people are doing that others aren’t? First, they’re paying off high-interest debt. Paying 20% in credit card interest can be a big drain on your finances. Second, they’re taking advantage of the full employer match for their retirement account—it’s like getting a bonus. And third, they have emergency savings. Having that buffer can help reduce stress and help you stay ready for whatever comes your way.

The way you save matters

Paolo Costa looks quizzically in the direction of a bold headline that reads “Savings accounts are NOT created equal. Here’s why.”
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Many investors don't realize that savings accounts aren't created equal. The difference in growth potential between a low-yield account—like a traditional savings account—and a high-yield account can be substantial. Over 12 months, a $10,000 initial deposit in a high-yield account with a hypothetical annual percentage yield (APY) of 3.50% compounding daily would earn you $356.18, while the same deposit in a low-yield account with a hypothetical 0.07% APY would earn only $7. Over 24 months, the difference grows to $725.05 versus $14.01. That's a big gap—and it gets even bigger over time!

APY can affect your bottom line, so it's important to find an account that offers a competitive rate and gives your savings more room to grow. Putting your savings in a high-yield account is a small but powerful way to set yourself on a path toward more peace of mind and greater financial security.

Savings accounts are NOT created equal. Here’s why.

You wouldn’t work for free—and your savings shouldn’t, either. Many traditional bank accounts pay next to nothing in interest, which is great for the banks, but it’s not doing you any favors. Your savings can work harder for you in a high-yield account with a better interest rate, and it’s well worth shopping around to find one. Too many investors are leaving money on the table, and they don't even know it. It can be a simple fix to get your savings into a high-yield account.

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1Based on a model of a regression framework showing the relationship between the Consumer Financial Protection Bureau (CFPB) financial well-being score and dummy variables for emergency savings of $2,000, emergency savings of at least 3 to 6 months of expenses, non-collateralized debt (credit card and health-related debt, among others), collateralized debt (mortgage and car loan, among others), different levels of income, different levels of education, gender, and family structure. All coefficients are significant at the 1% level. The sample size is 12,443. The baseline financial well-being score is 42.3, which represents a group in the sample with no emergency savings, income less than $50,000, no debt, and financial assets of less than $50,000. Source: Vanguard, 2025.

2In a survey of 12,443 clients, we asked: "In a typical week, how many hours do you spend thinking about and dealing with issues related to your household's finances?". For clients who had emergency savings, the average answer was 3.7 hours. For clients who did not have emergency savings, the average answer was 7.3 hours. Regarding financial stress at the workplace, we asked: "In a typical week, how many working hours are you distracted by your financial stress?". We found that individuals without any emergency savings spend an average of 6.1 hours per week distracted by financial stress at work, similar to a representative sample of American workers, who spend 6.4 hours distracted in their jobs because of financial stress (Sergeyev et al., 2024). In contrast, those who have at least $2,000 in emergency savings spend only 1.5 hours per week distracted by financial stress. Both questions were based on a recently published academic paper: Dmitriy Sergeyev, Chen Lian, and Yuriy Gorodnichenko. The Economics of Financial Stress. Review of Economic Studies, 2024.

3Vanguard's Guide to Financial Wellness (PDF), 2024.

 

All investing is subject to risk, including the possible loss of the money you invest.