Building an Emergency Fund: A Quick Guide

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emergency fund

Life happens all the time, and it's hard to go about predicting when or how surprises will arrive. Despite this fact, only 41% of Americans would be able to cover a $1,000 emergency with savings.

It could be that your income is cut or you lose your job and you cannot find a new job as quickly enough. As a result, you may find yourself struggling to pay your bills. Or it could be that your car gets a flat tire, your water heater breaks, or you need to buy an emergency plane ticket.

All of these are situations in which having an emergency fund can make all the difference. And given the unpredictability of life, it's vital to prioritize your emergency savings. Here are all the details about what you need an emergency fund for, and how to build emergency fund savings.

What is an emergency fund, and why is it important?

As the name indicates, your emergency fund, also known as emergency savings, is to help you weather unexpected expenses and emergencies. Having a stash of cash to fall back on when "life happens" means you won't have to rely on credit or rack up debt to resolve your situation.

It's the difference between having your car break down unexpectedly and leveraging cash you had already put aside for this exact purpose - versus maxing out a credit card and figuring out how to pay for it later.

The latter scenario means an additional or higher credit card payment, more debt, and more money woes to worry about. And more importantly, you are now further away from your financial goals. This can be majorly demotivating.

So essentially, you can think of your emergency fund as a form of insurance. An insurance policy that you create for yourself that keeps your financial goals intact.

Emergency fund examples

There are a lot of things that happen in life that aren't expected. Not all of them are emergencies, but it qualifies as one if (1) you weren't expecting it, and (2) it is something that has to be done, not something you just want to buy. Here are some emergency fund examples.

Your car breaks down

This is an emergency because you need your car to transport you to work, school, and other activities. Without it, your life could become challenging very fast. So paying to fix a broken car is a high priority.

You need to pay to fix a leak in your home

If your sink or toilet is leaking, it's definitely an emergency. You need to get this taken care of as soon as possible because it could pose a danger or at least a major inconvenience to you and your family.

Covering costs for a flight to see a sick family member

Illnesses happen and we don't always know about them in advance. But if someone in your family becomes sick, you don't want money to stand in the way of you being able to see them or not. An emergency fund gives you the chance to go and see this person even if they're far away.

How is an emergency fund different from a sinking fund?

While your emergency fund acts as money to bail you out of unplanned life circumstances, a sinking fund is typically used for planned upcoming one-time or irregular expenses like routine car maintenance or vacation savings, for example.

Your sinking fund can then be broken into specific sinking fund categories.

How much emergency savings should you have?

Ideally, your goal should be to have 3-6 months' worth of your essential living expenses in emergency savings. Before you think this is unattainable, it's important to know that this refers to your "basic living expenses."

Essentially, how much do you need at a minimum to pay for your food, housing, core utilities, and transportation? Is that number sounding more attainable?

The thing is, when everything is nice and rosy in our lives, we tend to get comfortable with spending money on "nice to have" items. However, your emergency savings really focuses on your "must-haves," which are essential to your life and survival.

Keep in mind that your emergency fund might need to be broader than just your basic living expenses. It's all about recognizing what might come up and accommodating that as you build your fund up.

For instance, if you are driving a 10-year-old car, it's more than likely going to need major car repairs soon. So you'll want to build the cost of that potential repair outside of a routine service into your savings plan. Some emergency fund examples include paying for medical bills due to illness, home repairs, unexpected rent costs, and more.

By having a savings plan in place, what could potentially be emergencies are now mere inconveniences.

That being said, a good first milestone to set is to go about saving $1,000. This can cover most basic emergencies and is a good amount to have if you need to focus on other pressing financial goals like paying down high-interest debt.

In a way, an emergency fund gives you the chance to provide yourself with personal loans without needing to pay or add debt payments to your life.

Emergency savings goal if you are single

If you are single, the more you have in savings, the better, so setting a goal of at least 6 months would be wise. This is simply because, as a single person, you might not have anyone else to fall back on for financial support.

Emergency savings if you are married

If you are married or in a relationship with a second income to fall back on, you can start with 3 months as a goal and raise it to 6 months once you reach 3 months of savings.

3 months because there are two incomes, and it is less likely that you would both be out of a job for the same amount of time, for example.

I will, however, stress that the more you can save for emergencies, the better. A year's worth of savings would be incredible to have, especially during economic uncertainty like a recession and covid-19.

How do you build an emergency fund?

Putting away 3 to 6 months of income for emergencies sounds like a lot. Still, start with saving a little of your paycheck. You can save over time until you eventually reach your goal without changing your lifestyle too much.

Remember, the amount of money you are saving is to cover 3 to 6 months of your basic living expenses, so your housing, your food, and your transportation NOT your non-essentials and nice-to-haves.

If an emergency comes up, you should leverage your emergency fund and then plan to replenish it later. Here are some key ways to build your emergency fund:

Come up with the amount you need to save

To determine how to build emergency fund savings, you will need to calculate 3-6 months of your essential living expenses. Remember, basic living expenses include your housing, food, medical expenses, etc. So, let's say the total amount of your essential living expenses is $2,000 a month.

You calculate $2,000 by the number of months you need to save for, such as 3-6 months. This means you will need to save $6,000-$12,000 in your emergency savings account to cover your living expenses. If you're unsure about this, use an emergency fund calculator.

This may sound overwhelming, but you can ensure you can cover your basic expenses by working towards this goal. Make this into smaller goals instead of focusing on the big goal.

For example, make it a goal to save your first $1,000 towards your emergency fund. This is an easier goal to attain. Eventually, you will build up your emergency savings to the needed amount for months of expenses.

Emergency fund calculators

An emergency fund calculator can help you decide how much money to save based on your expenses and the amount you can save. Here are some of our favorites:

Build saving into your budget

The easiest thing to do when wondering how to build emergency fund savings is to make saving money a part of your budget.

Make it a goal to keep a certain percentage of your pay or a set amount each week towards your emergency savings. If you happen to get a bonus from work, you can include that money in your savings, too.

For instance, you could save 10-15% of your pay or a set amount of $50 every week. Another simple way to start saving is to start living below your means.

By including regular savings into your budget, you will quickly bulk up your emergency fund and be prepared for unexpected events.

Automate your finances

To prevent the temptation of spending money rather than saving it, you should automate your finances. Automating your finances means you set up paying your bills and savings deposits to be paid automatically.

For example, you can set up automatic deposits into your emergency savings account through your employer. You can also set up automatic transfers through your bank to ensure you deposit into your emergency fund regularly.

Automating your finances can prevent money mishaps and help you save money easier. If you haven't, set up a paycheck direct deposit, too.

Save refunds and bonuses

It's easy to blow through tax refunds and pay bonuses, but that is money that can increase your emergency savings quickly. Rather than shopping, deposit that additional income into your emergency fund.

Think of it as an ace in the hole for when life throws you a bad hand, such as an unexpected job loss. Saving your refunds and bonuses can prevent you from racking up credit card debt and having to borrow money from friends or family.

Where should you keep your emergency savings?

Your emergency fund should be easily accessible and liquid. This way, you can get to it when you need it without having to wait or take a liquidation hit.

Keeping that in mind, don't tie your savings up in the stock market or in real estate. The best place to store your emergency money is an interest-bearing savings account or a certificate of deposit.

Is spending your emergency savings tempting? Consider setting up automatic deposits to a bank account at a different bank not connected to your primary checking account. Also, skip the checks and debit cards. Make it as easy as possible to avoid temptation.

You can start building your emergency fund!

Having an emergency fund is essential and should be part of everyone's overall financial plans. You now have some emergency fund examples and some ideas for how to build emergency fund savings. Make saving for an emergency fund one of your top 10 money moves to make this year!

The last thing you want is to be set back financially by not being prepared to handle things when life happens. So get started with saving for your fund today.

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