How to Build Your Emergency Fund

In recent years, many people all across the United States have experienced costly emergencies. Whether caused by natural disasters, an inconsistent job market, or something else entirely, we’ve seen many examples of just why we should all prioritize building our emergency fund. Let’s take a quick look at how you might want to prepare yourself financially for the unexpected. 

What Is an Emergency Fund?

An emergency fund is a dedicated chunk of savings that you set aside to cover unexpected expenses. The concept of creating an emergency fund has existed since long before humans applied it to currency. In agricultural societies, for example, communities built storehouses to help weather seasons of famine, drought, and harsh weather when there was little to no ability to grow food. As the world became more industrialized, the focus shifted from setting aside a portion of each crop’s yield to setting aside enough money to get through times of need. Just like storehouses held excess food in case of hard times, an emergency fund holds money you do not need today, but might be forced to rely on tomorrow. For example, you probably have insurance to manage expenses for your car, home, and even your health. Most of these plans can still leave you with out-of-pocket expenses, and they can quickly add up. Whether it’s a large deductible, incomplete coverage, or an increase in your premium, insurance alone is not the answer. Having an emergency fund does not prevent unexpected expenses, but it does help you get through hard times without burdening yourself with debt. 

Do I Need an Emergency Fund?

Life is full of unknowns. You never know when an injury might cause you to miss work, an appliance may need to be replaced, or a storm may damage your home and leave you with expensive repair bills. These are not things you want to plan or prepare for, but they are things that happen. An emergency fund can reduce the sting when you face these types of scenarios, and it can keep you from swiping a credit card or taking out new loans to navigate your unexpected obligations. It is a great way to protect you, your family, and your most valuable assets during hard times. An emergency fund is always a good idea, no matter your financial situation. As we’ve seen in recent years, no one is completely immune from things like severe weather, illness, or accidents. 

How to Get Started

Building an emergency fund is just like any other financial strategy. You start by identifying your goal, then assessing your budget. As you determine what you can commit to setting aside, think about your short- and long-term goals. Set milestones for yourself, and have a plan to get from one level to the next. 

Start by Saving $1,000 

You’ll want to start taking baby steps right away, and set aside $1,000 as quickly as you can. Many people recommend giving yourself a one-month limit, but that simply may not fit every budget. That’s ok if that’s your situation as long as you prioritize reaching your $1,000 goal. Here are a few steps you can take to achieve that: 

Honest Budgeting: Take a strict look at your expenses, and cut out what you don’t really need. You can always add items back once you reach your goal. 

Grocery Lists: Create a shopping list in advance. By planning your snacks and meals for the week, you can significantly cut down on what you spend at the supermarket. 

Boost Your Income: Many Americans take advantage of our modern “gig economy,” and find side hustles that can help generate extra income on a schedule that works with their busy lives. 

Cut the Clutter: We all accumulate things over time. Dig through your closet and look for items you might be able to sell to help kick-start your savings. 

Save Enough to Cover One Month’s Expenses 

Once you hit your first goal of setting aside $1,000, it’s time to think about the next step. A second milestone in building your emergency fund is to increase that $1,000 to an amount that would cover your monthly fixed expenses. Since you’ve already reached one goal, you should have a good idea of what strategies are most effective for you. Continue taking those steps until you have enough in your emergency fund to cover your expenses for an entire month with no income. 

Growing from One Month to Three

 As you watch your emergency fund grow from $1,000 to a full month’s worth of expenses, you should be able to easily recognize what’s contributing to your success. Celebrate the victory of achieving another milestone, but start planning for how you can grow your fund from covering a single month’s expenses to covering your expenses for three months. It’s true that this can be a significant jump, but by this point, you’ve already identified some methods that work for you, so continue applying what you’ve learned and you will reach your new goal. 

How Much Is Enough?

Once you’ve set aside enough savings to cover three months of expenses with no income, you have a decision to make. Some advisors will encourage you to keep going to grow your emergency fund from covering three months’ worth of expenses to six months. However, that’s a personal decision. An emergency fund that covers your expenses for three months is certainly a healthy security blanket. Once you reach this point, it may be a good time to shift your focus to other financial goals. The purpose of your emergency fund is to keep unexpected expenses from throwing your other financial goals off track. Once you reach your goal, put your money to work with things like paying down debt, prioritizing your other savings goals, or enjoying some small indulgences. 

What to Look for When Creating an Emergency Fund

After you’ve established your plan for building an emergency fund and put it into action, make sure your money will be available when you need it. You should absolutely create a separate, dedicated account for your emergency fund. Here are four things to look for when you open that account: 

Access to Your Money: You need to ensure you have money when you really need it, so it’s important to find out how easy it is to access your funds on short notice. When comparing accounts, consider things like whether you will be able to access your emergency funds through an ATM or with your financial institution’s digital banking service. 

Dividends Earned: Some savings accounts allow you to earn dividends on the money you deposit. Choosing an account that pays dividends can help you reach your savings goals faster. 

Monthly Fees: Different financial institutions may levy fees for different account types. Before you open your emergency fund, make sure you avoid monthly fees wherever possible, because they can add up over time and make it harder for you to reach your goals. 

Minimum Balance Requirements: Some accounts have requirements about how much money you must keep in your account. Since you may have to make an expected withdrawal from your emergency fund at some point, it’s a good idea to avoid accounts with a high monthly balance requirement.