How to start an emergency fund

You get the call you thought you never would. Your significant other, the breadwinner, has just lost their job. Or your daughter fell off the monkey bars at school and broke her arm. Maybe it was you who had planned to keep your car a few more years and got into a significant fender bender on the way to work.

There doesn’t seem to be a hard and fast rule for funding an emergency fund among finance experts. Dave Ramsey recommends a starter emergency fund of $1,000, followed by a fully-funded emergency fund of three to six months. Suze Orman recommends a long term goal of eight months of expenses for an emergency fund.

Wow, that’s overwhelming. How in the heck do you even begin to save money like that? Is it really even necessary?  Continue reading for tips on how to begin.

Do I need an emergency fund?

Yes! Do not fall into the trap of thinking nothing bad happens to you and you will never need one. There will be a time in your life where you or a member of your family will fall on hard times. It may be the loss of a job, an unexpected injury, or a catastrophic household repair.

Stacy, a close friend of mine, has a neighbor who had a horrific house fire last year. The fire literally burned everything but the basement (thankfully many keepsakes were in the basement and were able to be salvaged).

Not only would the people who had this horrific incident be glad to have an emergency fund. My friend Stacy had significant siding damage to her house. Insurance would only cover one side of the house that was basically melted off.

Unfortunately, they couldn’t find the same siding color that matched exactly to replace just the one side, so the other 3 sides of siding had to be replaced out of pocket.

They argued with their insurance company until they were blue in the face with no luck. So ultimately she had to fork over, out of pocket, enough money to re-side 3 sides of their house for a fire that wasn’t their fault! It was expensive. It was frustrating. It was unfortunate.

But it was paid in cash with their emergency fund and they have since moved on with their lives.

Emergency funds are often overlooked as not needed or essential. But when (not if, when) the time comes that you need to tap into it, it’s so convenient for it to be there.

Why start an emergency fund?

How much money should I have in an emergency fund?

That number will vary greatly from person to person. It depends on your income, and almost more importantly your expenses.

Income and expenses are two entirely different things.

If you don’t spend everything you make, your emergency fund can be based on typical expenses, not complete income replacement. So when you hear the range from financial experts of anywhere from three to eight months, you don’t have to multiply your monthly income by 8x.

Calculate approximate monthly expenses, and multiply from there. That will give you a really nice financial cushion.

Another factor in how much money you may need in your emergency fund is your personal situation. Are you in a dual-income household? Are you a solo parent? You will have to define your own level of comfortability with an emergency and how much in savings will help you sleep soundly at night.

If you’re in a dual-income family you may not need as much replacement if you assume the other half will be working. If you are a solo income with children, your personal level of comfort may be a higher number.

What do you include in a calculation for an emergency fund?

Honestly, it’s really just the basic NEEDS. Yes, I said needs. Not wants. And the line can get a bit gray here, but really should be blatant needs:

• Rent
• Groceries
• Gas/electric
• Other bills (insurance, car payments, gas,
• Childcare costs

Add up the items above that you typically spend monthly and multiply by the number of months you would like to save for.

For example, if typical household expenses are $2,000/month and you’d like a 3-month emergency fund, your goal would be $2,000 x 3 or $6,000 dollars.

Pro tip: Tack on an additional 5-15% above and beyond the items above for an additional safety net. Expenses may change. Or you may have underestimated how much you actually need.

What are NOT emergencies:

• New clothes
• Vacations
• Concerts
• Eating out/happy hour

You have to be committed to not going into debt when the unexpected happens. So if you find yourself in a situation where you have to tap into your emergency fund, you may need to change your spending habits. Especially if it’s for a longer-term period, challenge yourself to spend less.

Why is it important to have an emergency fund?

Emergency funds are designed to keep you away from debt, or minimize debt when an unexpected expense arises. Yes, you can use credit cards or take out a loan for an unexpected expense, but paying in cash, or a majority in cash, will avoid you paying interest on these things.

It’s a safety net so you can focus on resolving the challenge, not take on stress because of debt.

There is nothing worse than having something horrible happen, then have your finances take a dive because of it too. The sooner you can pay for it, the sooner you can get past it and move on!

Tips to start an Emergency Fund:

1. Understand your current finances

Document your monthly income and typical expenses. Setting up a budget if you don’t already have one would be a good idea. Try a zero-based budget if you don’t’ have one today. It’s hard to make a plan for saving money if you aren’t entirely sure where your money is coming and going today.

Plus, making a budget will help you see where the money will be coming from to fund the emergency fund.

2. Set a goal

Understand how much you wish to save. Once a budget is set up or you have a handle on typical expenses, add up the NEEDS: clothing, shelter, food, etc. and that becomes a one-month emergency fund number.

Pro tip: start with a small, achievable goal and grow. 3-6 months of living expense may feel highly unachievable. It likely will feel that way for most people. Don’t let that get you down. Start with $1,000 as a goal. Heck, start at $100. Achieve that goal, then make a new one.

Over time you will develop habits that will make it easier to continue to contribute to your emergency fund. Also, you may even find additional ways to fund the emergency fund.

Try this Emergency Fund Calculator if you’re at a loss of where to start.

3. Make a plan to start saving (make contributions automatic)

So you know now how much you would like to save, but how do you get there? What is your plan to start saving the money you have committed to?

First, take a look at the budget you just created. Identify a few areas that you consider wants, and see if you can cut back. Could you eat out one less time per week? Make fewer trips in your car or combine trips. Delay that vacation or consider a cheaper road trip and put that money aside for the future.

If an emergency fund is truly something you want, then you’ll have to make efforts, and sacrifices to get there.

Tips for starting to save:

• Identify areas in your current budget where you can cut back. Not sure how to start a budget? Try a zero-based budget. 
• Try using the envelope method for a few months where you take cash out for various budget categories and are only allowed to spend that cash (food, gas, etc.)
• Automate your savings: Try an app like Acorns
• Keep track of total savings to keep you motivated to continue to save!

Are you ready for a financial emergency?

4. Make a plan of where to put the savings

Once you start saving money, you are going to need a safe, and accessible place to put it.  You don’t want to be tempted to withdraw from this account. But it also has to be readily available quickly if you, unfortunately, do need it.  This safe place should be dedicated to the emergency fund and separate from your regular checking or savings accounts.

Online savings accounts are an excellent option for an emergency fund. They are out of reach. Meaning, you can’t just go to a local ATM and withdraw from the account.t But they are also easily accessible meaning within a day or two the money would be in your account.

I recently opened a Goldman Sachs account that at the time had a 2.25% interest rate which is phenomenal! Rates can change at any time but you might as well get your money to work a bit for you.

5. Stick to the plan

You know how much money you want and have crafted a plan to get there. Now what? The hardest part is simply keeping yourself honest with the plan. Becoming so dedicated to achieving your emergency fund goal that you’re willing to forego short term spending to achieve longer-term financial security.

Write down why you want to start an emergency fund, to begin with. What scares you most about an unexpected expense? Then remind yourself of your “why” if you feel yourself losing momentum with creating an emergency fund.

6. Monitor your progress, and adjust as needed

Periodically, try monthly or quarterly, check in on your emergency fund goals. Are you sticking to the plan? Can the plan be adjusted? You may find you can actually save more, faster than you thought. You’re committed to saving and you’ve been able to find other ways to add more money to your fund, that’s freaking awesome.

Or, you may be on the opposite end. You may find that saving has been harder than you expected. If you truly can’t meet your current goals and timeline, then re-adjust. The ultimate goal is to have an emergency fund, and the easiest way is to save consistently.

So dial in on that number, even if it means adjusting so you aren’t saving as much and it takes you longer to fund. The goal is to fund it.

Related: What I won’t give up to be financially free faster

7. Don’t touch it!

This may be the hardest step of all. Do not spend it for anything other than emergencies. And guess what, theoretically, emergencies shouldn’t come up all that often. And when a true emergency does, you will be so happy and thankful you have the account funded.

Ways to build an emergency fund fast

• Save your tax return/refund
• Find a side hustle or supplemental income (side jobs, etc.)
• Try a no-spend month and save money from that.
• Sell things you don’t use (garage sale, Facebook marketplace, Poshmark, eBay, etc.)
• Make budget cuts
• Curb impulse purchases with these tips and tricks
• Save your spare change. Works really well especially if you’re on a mostly cash budget.

To spend or not to spend your Emergency Fund?

What actually constitutes an emergency? The line between what is or is not an emergency is up to you to define. Saving the money for true emergencies and not tapping in prematurely, even though you’re tempted, will only benefit you if something should arise in the future.

It may be hard as you’re building up savings to not spend it on something else. Remind yourself of why building an emergency fund is important to you, and think of your family.

Start an emergency fund today

if you don’t have money set aside for an emergency or unexpected expense, the time to start is now! Don’t fall into the trap of thinking you can’t afford it or it’s too hard. Review your income and expenses and identify a realistic number you want to have for an unexpected event that inevitably will happen at some point in your life.

Then chip away at that number, saving small amounts as you can, to begin with. Then work up to more as your budget allows and your commitment to achieving your goal deepens.

Do you have an emergency fund?

have you ever had to use your emergency fund?

Steph