How to Create an Emergency Fund

An emergency fund is a great way to cover unexpected expenses without threatening your financial security. When you experience a job loss, require medical care because of health issues, or need to make significant car or house repairs, having a fund solely dedicated to covering expenses such as these can be the difference between staying financially stable or falling into debt. With 60% of Americans reporting that they are uncomfortable with their amount of savings, it’s important to start building a safety net to prevent going into debt just to meet your basic needs.

Let’s explore the ins and outs of an emergency fund and how to create one that works best for your financial goals.

How much should I keep in my emergency fund?

A standard emergency fund should hold at least three to six months’ worth of your living expenses. Theoretically, your emergency savings should be able to cover all your expenses if you were to unexpectedly lose your job and be out of work for that designated amount of time. Keep in mind that the total amount in an emergency fund varies from person to person, depending on expenses, income, and lifestyle preferences. Your three months’ worth of emergency savings may look vastly different from someone else’s.

Regardless of the total amount your emergency fund holds, building “rainy day savings” can not only help you avoid debt when an unexpected expense pops up, but can also help reduce financial stress about the unknown expenses the future may hold.

It’s important to note that you will want to leave your emergency fund in an easily accessible cash account. It’s not recommended that you invest your emergency fund.  You’ll want the amount you saved available at any time for an emergency, so a principal secured account like a savings, money market, or high yield savings account  is preferred.

Know your budget

Creating a realistic budget can help clarify how much your emergency fund should hold. A budget that includes both your expected monthly bills and your variable living expenses can:

• Help you understand how much money you should be putting towards your savings monthly
• Help you calculate the total amount for your emergency fund, which you’ll want to update as your expenses change over time.

By creating a personal budget where savings are already built in, you’re creating the opportunity to prioritize saving as much as you prioritize your regular expenses and spending. Prioritizing saving is guaranteed to pay off in the future when those extra funds are most needed.

As a reminder, it’s best to check your emergency fund amount regularly to make sure it’s still accurate against your budget expenses.

Identify your goals

It’s important to clarify and refine the end goal of your savings. While we know emergency savings exist for the purpose of covering unexpected expenses, you can have other savings that are more specific, such as saving for a down payment, vacation, or new car. These goals can be as big or small as you make them.

While you can get creative in your savings allocation, it’s essential to establish an emergency fund first and foremost before you begin filling up those other dedicated savings buckets. Aim for $500 to $1,000 set aside in your emergency fund to get yourself started. You don’t have to have a fully funded emergency savings immediately. Instead, you can continue to add to the fund as you go. This way you’ll have some basic funds available to you when an unexpected expense pops up.

This also means if you have a debt payoff goal, you should still prioritize building an emergency fund first before planning extra funds to pay off debt.

Set up a system

Taking the time to intentionally set up a system to make those savings a reality is well worth your time. You can start by allocating savings in your monthly budget or by paycheck.

Here are some methods that can help systematize saving:

• Automatic transfers
• Manual transfer on payday
• Different savings accounts for each of your individual saving goals, and nicknaming those savings accounts based on the goal in online banking
• Hiding accounts in online banking (“out of sight, out of mind”)
• Keeping your savings at a different financial institution from your checking
• Keeping the savings in a money market or high-yield savings account to earn more interest on your savings

Build a saving habit

Building a routine helps you begin your savings journey and makes building that emergency fund easier over time. Starting small and allocating a realistic amount into savings based on your budget will always be better than putting too much in and taking funds out for living expenses throughout the month. Even $5 set aside each paycheck is better than nothing. Start small, and remember that consistent, habitual action will pay off in the long run.

Building emergency savings will help reduce stress and build flexibility into your finances for the long term. Your future self will thank you later.