Life is unpredictable. Your air conditioner may need an expensive repair, or you could have a costly medical emergency.
If you don’t have a financial safety net, you might use your credit card to finance the expense. Unfortunately, that only continues the cycle of debt.
Emergency savings is the perfect tool to help deal with unexpected expenses. This guide shares how to build an emergency fund so that you can have peace of mind when life throws curveballs at you.
Table of Contents
What is an Emergency Fund?
An emergency fund is a bank account devoted to paying for substantial, surprise expenses.
Examples can include:
- Major repair or replacement of home appliances
- Large, surprise medical expenses
- Significant car repairs
- Missing a paycheck
- Last-minute travel due to the loss of a family member
Emergency savings do not include minor expenses or anything you purchase for leisure. Those are supposed to come out of your monthly budget.
These savings are meant to help you if you lose your job or have a major expense.
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How Much Should I Have in My Emergency Savings?
Your emergency savings should have enough money to cover three to six months of living expenses.
If you don’t have a savings account, the thought of saving that much can be overwhelming.
Regardless of how difficult that goal may seem, you should still start an emergency fund. You want to begin with the Dave Ramsey baby steps and create a goal to save $500, then $1,000.
This will help you build the confidence necessary to continue to reach three to six times your monthly expenses. It will also put you ahead of many other Americans.
Read our guide on common monthly household expenses to gauge how much you might want to save.
Nearly half of all Americans (44 percent) would be unable to pay an unexpected expense of $1,000 from their savings, according to CNBC. If that’s you, it can pose significant challenges.
It will take work, but saving your first $1,000 is a terrific way to create a financial buffer to serve your needs.
How to Start Your Emergency Fund
Developing a solid financial plan is an essential part of becoming financially stable. Here are the steps you need to follow to build an emergency fund.
Create a Budget
A budget is often viewed as restrictive or difficult to manage. However, neither is the case. In fact, living on a budget brings freedom to your life.
Budgets allow you to create a spending plan for your priorities. For example, when I first started budgeting, it was at the beginning of my debt payoff journey.
My budget allowed me to have a strategy to attack debt and begin to plan for the future. Financial apps like You Need A Budget (YNAB) make it simple to start and monitor everything in one place.
Read our guide on how to create a budget to help you get started.
Track Your Spending
A budget is a plan for your money. Tracking your spending is the key tool to managing your budget. When you track your spending, you monitor every dollar you spend, even if it’s a small amount.
This may seem tedious, but a tool like YNAB can help. When you monitor your spending, you will see what’s leaving your bank account.
If this amount exceeds your monthly income or is close to it, it’s time to spend less. Use this information in conjunction with your budget to identify opportunities to lower your monthly bills.
As you start saving money on your bills, put it in your emergency fund.
Don’t let the savings hold you back, either. Even if it’s only $40 or $50 a month, you want to put it towards your savings.
Create a Goal
If you want to build an emergency fund, having a goal is essential. This is especially true if you’re new to managing your money.
Don’t keep this goal private. Share it with a friend or family member who can both encourage and challenge you.
Additionally, making the goal quantifiable is best for success.
For example, if you want to reach $1,000 in savings, have a timeline and action steps you’re going to take. That will help empower you to continue when you want to give up.
Having a goal was key for me when I was trying to pay off debt quickly. Paying off $50,000 was overwhelming, but breaking it down into smaller chunks with set goals motivated me.
The same can be done when trying to build your savings.
Ways to Build Your Savings
Reaching a fully-funded emergency fund is possible, but it does take work. But, with a little effort you can save $500 a month or more to reach the goal.
Here are some ways to bolster your efforts and save money faster.
Cut Needless Spending
The easiest way to grow your savings is to identify areas to increase savings. This is where tracking your spending is essential.
You want to look at everything you’re spending money on and question the value that you’re receiving from each expense.
As you whittle down your expenses, your newfound funds can go into a separate account devoted to emergencies. This may not grow your savings quickly, but it’s a great place to start.
Furthermore, it’s best to avoid apps that loan you money as that will only continue the cycle of debt.
Here are some common areas to cut:
Cable: The average cable bill is over $200 per month. If you’re struggling to save but are paying for cable, this is the best area to cut.
Live TV streaming services cost a fraction of what you’ll pay for cable. Switch to a streaming service and put the remaining amount towards savings.
Cell phone: The average cell phone bill is over $140 a month. If you’re paying anything close to that, you can move to a no-contract provider and spend as little as $20 per month, even if you use a lot of data.
There are numerous prepaid phone plans you can choose from that have the same reliability as Verizon but don’t cost as much. Choose one and put the extra towards your savings.
Auto insurance: When was the last time you compared auto insurance rates? You should do it at least annually, especially if you have a good driving record.
Savings will vary, but it’s possible to save several hundred dollars a year by comparison shopping. Those funds can go directly into your savings. This is especially true with auto insurance rates jumping 26 percent across the United States, according to Bankrate.
These are just three examples of ways to grow your savings. As you track your spending, it’s likely you will identify other opportunities.
Rinse and repeat until you optimize your finances.
Increase Earnings
Earning extra income is the best opportunity to build an emergency fund. Additional earnings come from two sources, including your day job or a side hustle.
Ask your boss if there are more tasks you can take on or if you can work extra hours. If neither option is available, a side gig is a terrific option.
There are countless opportunities, many of which don’t require special skills. Working for DoorDash is one such option.
As a Dasher, you deliver meals from local restaurants to customers. You can set your own schedule. Driver pay varies depending on numerous factors.
Pay is weekly via direct deposit. Put that money into a high-yield savings account and watch it grow.
Automate Your Saving
Saving regularly is an effortless way to grow your emergency fund. Thanks to automation, it’s simple to pay yourself first.
Simply ask your employer to make an automatic deposit from each paycheck into a separate savings account. There is no charge to do this, and you can deposit as little as you want.
When I started to do this, I had $10 from each paycheck go into my savings. That amount grew over time to accelerate my efforts.
If your employer doesn’t offer this perk, you can do it at your bank. Ask them to transfer a set amount from your checking account into a savings account every week, two weeks, or monthly.
CIT Bank is a fantastic choice to automate your savings where you can earn 4.85 percent through their Platinum Savings account choice. You must have a daily account balance of at least $5,000 to earn this rate. If you have beneath that, the rate lowers to 0.25 percent.
Save Found Money
Saving money you didn’t expect to receive is a terrific way to start and grow an emergency fund. While it’s not as predictable as cutting spending or earning more, a windfall is a legitimate way to grow savings.
Here are some examples of found money you can add to a savings account:
- A generous tax refund
- Cash from selling items you no longer use
- Finding unclaimed property
- Unexpected refund
No matter what the amount is, put it towards your savings. Every extra dollar you find gets you to your goal quicker.
Review Quarterly
Setting it and forgetting it is not a reliable way to grow your safety net. Life changes, so you want to check in on your progress at regular intervals.
Quarterly is best as it allows you to get a consistent look without changing too often.
Ask yourself some of the following questions when you check-in:
- Do I have extra money in my checking account I don’t need access to?
- Where am I over or under spending?
- Am I earning more money than I planned for?
- Did I need to pull out savings over the last quarter?
Depending on your answers, you might be able to save more money. If so, you can increase the amount you’re saving each week or month.
Don’t be afraid to pull back if necessary. Growing your savings is a marathon, not a sprint.
Where Should I Put My Emergency Fund?
Your emergency savings should have two traits. It should be liquid, and it should be readily accessible.
Also, it should be a separate account from your checking.
An online bank like CIT Bank is a perfect choice for where to put your emergency fund. It has a low minimum account balance and allows you to transfer money quickly when you need it.
CIT Bank lets you open a savings or money market account with as little as $100. Transfers to outside accounts take just one business day.
What Do I Do After I Reach My Goal?
Once you reach your goal, you shouldn’t stop setting money aside in your savings account. Life is not stagnant, and your needs can regularly change.
Common life changes that may impact your needs include:
- Getting married or divorced
- Having a child
- Moving
- Buying a new house
- Impending retirement
All of these impact how much to save for an emergency fund. Consistent monitoring of your needs is the best way to stay on top of how much you should save.
You may also need to pull funds from your account over time. If so, you should create a plan to restore those funds.
Bottom Line
Building and growing an emergency fund is a vital part of financial success. Having one protects you in times of need and promotes the idea of saving money.
You won’t reach three to six months of living expenses overnight. However, starting with a simple goal of $1,000 is an excellent way to create the momentum necessary to reach your ultimate goal.
What’s another way you’d suggest to help build up a safety net to deal with emergencies?
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I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.
Due to lots of medical expenses in 2015 our emergency fund is drastically reduced and I don’t like it at all. We’re putting investing on hold until we can build it back up because 2016 is going to be a big year of changes for my wife and I.
I think you hit the nail on the head with the conventional advice of 3-6 months being overwhelming for some. If you’re currently spending at or above your means and have no savings 3-6 months of expenses in cash seems impossible. But you have to start somewhere. Even if it’s $20 a month that will add up over time and as momentum builds your enthusiasm should as well which will lead you to look for other ways to try and boost up that monthly savings.
Sorry to hear that JC, though thankfully you had the funds needed to take care of things. Completely understood as to why you’d pull back on investing this year to replenish it to the level you want.
Yep, I think too many let that overwhelming feeling hold them back from starting. We all have to start somewhere and if it’s at $20/month then it’ll add up over time.
We have enough expenses to last us about 5-6 months if something were to happen. My wife stays home full-time with our daughter so I wanted to make sure we had a solid amount set aside in case something were to happen to my position and our one current income. I don’t care if this money isn’t invested and might be losing purchasing power due to inflation. I see it as financial security and it helps me sleep easier at night.
You don’t need to save it up all at once. This amount took years of savings to get to and we started out at saving $20 a paycheck and soon were able to bump it up over time. Start small or start large, the important thing is to start.
That’s awesome Thias! Being self-employed, we’re very much the same way. It ends up being a chunk of money, but it helps us sleep at night.
I feel very blessed that I’ve never had to dip into my emergency fund, but knowing it’s there brings me so much comfort because it’s so true that an emergency expense can come up at anytime. Your roof could start leaking in tomorrow’s rainstorm or you could end up in the emergency room and max out your insurance in no time. These things could cost you well over $400. That’s why I would say saving 3-6 months of living expenses is so important. Start little because it can be overwhelming, but make it a priority today!!
Very well put Jordan, could not agree more.
Sure I can handle a $400 emergency, but probably not a $4,000 so I’m working on building up my emergency fund.
That’s cool Jaime, we all have to start somewhere and the point is you’re building – which is key. 🙂
This is so important! I have a sufficient emergency fund and I think it’s one of the first things people need to do to feel better about their finances. You have to be able to handle an emergency (and using a credit card doesn’t count)!
Exactly Natalie! You never know when something will come up and a credit card makes for a VERY poor EF.
I went without an emergency fund in my early 20s. Looking back, I don’t know how I slept at night!
Same here Holly – I couldn’t do it now.
I never want to be in a position where I can’t scramble to find $400 anymore. NEVER! I do not want to be a statistic. It’s really incredible the amount of people who are not saving a dime. It seems everyone around me does pretty well, but looks I guess are deceiving!
They definitely can be Tonya. I’ve met too many people that look like they’re doing ok but they have no safety net.
It’s been a while since I didn’t keep an emergency fund of some sort. To build the fund initially, I moved in with my mom and sold a bunch of games/CDs/books. Sometimes selling stuff is the jumpstart you need to start building your savings.
I also enrolled in one of those “keep the change” programs, where they rounded up all of the purchases from my debit card and put it in my savings account.
Those are all great ideas to get started Emily! We still sell stuff from time to time and the money often goes in our EF.
A $400 emergency is nothing. You can have one of those in a heartbeat. No matter how often I hear these type of statistics it still amazes me how many people are not financially prepared for something this basic. I don’t see how you can ever move ahead without having a basic emergency savings fund. It’s the #1 step you should take to get right with your finances. I’m glad we have one…it’s saved us time and time again.
It always amazes me as well Brian. A $400 surprise expense can pop up pretty much at any time.
I feel like we have way too many $400 emergencies, but we’ve put ourselves in that position with several rentals! I do feel that we could withstand just about any financial emergency for 6-12 months. It feels really good to be able to have that peace of mind. We lived without it for way too long.
I’d imagine having rentals would increase your likelihood of them popping up. But, y’all have done the important thing and protected against it impacting you.
I would definitely be able to handle a small emergency like that now, but a couple of months ago that was a completely different story. Almost all of my emergency fund had been depleted due to one thing after another. It was hard at first being in the midst of it all but it taught me why having that money set aside was truly necessary.
Well, sorry to hear that Amanda but definitely glad you had the funds available to get you through that time. You hate to use it, but thankful you have it. 🙂
I used to be one of those people that couldn’t handle a $400 emergency. I actively started saving and finally started saving. I’m still in the process of adding more to emergency account.
As was I Jason, very cool you’re building it up.
There was a time when we couldn’t handle a $400 ER but thankfully those days are far behind us. We’re aggressively paying debt off so don’t have a huge cushion but if the shit hit the fan tomorrow, we could probably handle about $2,000. Our ER fund is never less than $1000 (about $1500 now) but because we put so much extra towards debt every month we could easily find $500-1000 more in any given month if we needed.
I remember being in those days as well and glad they’re behind me. Totally understood why you’re keeping it at the level you are now – it’s going to feel great when that debt is killed! 🙂
I tweeted about this statistic a few days ago and I think it really highlights what a huge part of our society lives paycheck to paycheck. There’s a lot of reasons for it and I think there are some forces (i.e. lack of education, poverty, student loans) that play into it. I don’t think there is one solution that will solve the problem.
I would tend to agree, to a certain extent, DC. I absolutely believe there are those who face factors like poverty, lack of education, etc and those need to be dealt with. However, I know there are many others in this situation simply because they overspend – even with a “good” salary.
This is why the number one goal I give my clients is to build up their emergency funds. Yes, if you have debts it sucks to pay interest or have them out there, but if you don’t have the cash saved up, then you end up paying more in debts because you didn’t have the cash for the emergency.
Completely agreed Shannon. It’s one the biggest keys to breaking that cycle of debt, in my opinion.
Luckily, we are able to handle a $400.00 emergency…the almost 6K hospital bill after my husband’s heart attack – not so much.
Sorry to hear about that, hopefully he’s on the road to recovery.
For the first time in my life, I read this title and was relieved instead of fearful. I finally have an emergency fund saved and I am so happy! Given it’s still small, it’s started, and that is more than I could have imagined just one year ago.
Side hustles are the greatest way to increase income and add to savings accounts, but also just budgeting to pay yourself first is key if you don’t hold duplicate jobs. Simple, but effective.
That’s awesome Alyssa! The fact you have one and building it is the key takeaway.
Yes, simple, but also very effective.
I feel so fortunate that we have plenty of money in the bank if something comes up and truly can’t imagine being on the brink of financial disaster all of time time. I have always been a planner though so even if I didn’t have an emergency fund I would be squirrelling away every little bit to build it up.
I am going to talk with my mom about switching her cell phone plan to Republic Wireless as I think it could save her money as she does need to build up her savings.
I feel the same way – there were days we weren’t in that situation and it was horrible. You should definitely talk to your Mom about making that switch – it can save big money.
For many people it seems like expenses = income. Budget = method to make sure they spend all their money. When you free yourself from this mentality you have plenty left over each month and the things that were emergencies are covered and then some by your monthly cash flow to savings. Personally it works best for me keep my extra savings in my taxable investment account where I can always pull it out penalty free if needed for large expenses, but doesn’t tempt me to spend it like it would if it were in a bank account.
That’s an excellent point Mark. I think, so often, many just see their paycheck and see all of it as money to be spent.
We (my wife and I) don’t have a sufficient emergency fund now and were very much the statistic from 2012-2014 the first three years of our marriage and went through a lot of financial upheavals.
We did everything that you could think of – took money out of my 401k, borrowed from my 401K, ran up to credit cards, borrowed from my parents, etc.
Even now our emergency fund is only $1000 but I sleep pretty well now. That’s been sufficient to handle most unexpected expenses.
I thought about what are unexpected expenses for us.
1. Job loss: if she lost her job we could handle things on my income. If I lost my job we would have to come up with around $4000 a month. Right now we would have to dip into the 401K. I’m in a hot field and it has never taken me longer than 30 days to change jobs.
2. Car repairs: line of credit with the car repair place with no interest for six months. If it were something major, I could do without a car and just work from home.
3. Medical expenses: health insurance + HSA. But you can always make payment arrangements with medical providers.
4. Home repairs – none. We rent.
5. Emergency trip to see relatives. Our relatives are within easy driving distance (less than 200 miles).
Also, with enough notice – 30-45 days, we could re-arrange our retirement savings/debt payoff plan to come up with at least an extra $1000 or if I had a suspicion that my job was going through things.