Emergency Fund: Your Guide to Building an Emergency Fund

Life can, at times, be difficult and costly. Nothing derails your financial progress faster than an emergency or even a global pandemic. You may have experienced an emergency dental procedure, an expensive car repair, a broken appliance, or maybe even needed to replace your cell phone. These types of financial situations can happen to us all at one time or another. This is why setting up an emergency fund is a must to protect yourself from financially falling behind.

This guide to building an emergency fund will help you answer the following questions:

What is an emergency fund?
Why do you need an emergency fund?
How much should be in an emergency fund?
How to build an emergency fund?
Where to keep your emergency fund?
Can building an emergency fund be a bad idea?

What is an Emergency Fund?

An emergency fund is a financial reserve for unplanned emergency expenses. Unexpected expenses can be stressful. An emergency fund could be a separate savings account or a place where you keep cash-on-hand. The idea is to have immediate access to the funds needed to meet an emergency expense.

Why Do You Need an Emergency Fund?

Not having an emergency fund could set you back financially when an unforeseen expense occurs. Research shows that those without an emergency fund continue to struggle from one financial emergency to another. Most people without an emergency fund tend to pay for emergency expenses with credit cards, which is generally harder to pay off.

An emergency fund could also help give you a little peace of mind in the event you unexpectedly lose your job.

Two of the most commonly asked questions about emergency funds are, "How do I build an emergency fund?" and "How much money should be in it?”

Let’s look at the second question first.

How Much Should Be in an Emergency Fund?

Many financial experts suggest you have at least 3 to 6 months of expenses saved in an emergency fund. If you are just getting started building your emergency fund, you will not likely have that money sitting around for your fund. As an example, if you have monthly expenses totaling $3,000, you would want to have an emergency fund of $9,000 to $18,000. This may seem like an overwhelming amount, but do not worry, you can build to this amount over time.

When determining your starting savings goal for your emergency fund, it is best to focus on covering your expenses. An emergency fund is not for vacations and luxury items.

Remember, any emergency fund is better than none!

41% of Americans reportedly do not have enough savings to cover a $1,000 emergency. – CNBC

How to Build an Emergency Fund?

The best way to start is to just start. Yes, it can be that simple. If you never start saving, you will never build your emergency fund. Also, understand that establishing your emergency fund is not a sprint; it is a marathon. It will take time to build your fund to the 3 to 6 months of expenses level or whatever amount you have decided to save.

9 easy ways to get your emergency fund started

1. 1. Make a budget to find where you can save money. Creating a budget will help you to see where you might be able to save some money. If you already have a budget, you just should review it to discover areas you could save.
   2. Automatic deposit. After reviewing your budget and finding areas you can save, have that amount directly deposited into your savings account or whatever account you are going to use for your emergency fund. This will help you ensure you are putting money away into your emergency fund.
   3. Sell unused or unwanted items. It’s highly possible you have items in or around your house that you no longer use and could sell. Maybe you don't use that treadmill anymore, or you have two power drills, but you only need one. Look around and find items you could convert to cash. You can have a yard sale or post pictures and prices of the items you want to sell on an online marketplace.
   4. Use your tax return. In 2019, the average tax refund was $2,869. You could take part or all of your tax return to start building your emergency fund. You could do the same for each year to continue building or even replenish your emergency fund.
   5. Increase your income. Getting a part-time job can be a way to increase your income and your emergency fund. The thought of working additional hours may not be ideal, but it is a way to build your fund.
   6. Shop around for better insurance rates. If the state you reside allows for competitive insurance rates, get quotes from a variety of insurance agencies, you may be able to get a lower rate. Doing so would allow you to put the savings into your emergency fund.
   7. Bring your lunch to work. You might be surprised how much money you could save each week by bringing your lunch to work versus going out to lunch every day. Even small sacrifices like this can help build your emergency savings.
   8. Stop eating out. You may want to eat out because life gets hectic and eating out seems easy. It may be easy, but it is also expensive. These meals can add up to hundreds of dollars each month, and you could instead put that money in your emergency savings fund. If you are a coffee drinker and you buy your coffee from a coffee shop, try drinking coffee at home or at the office. You'll be amazed at how much you might save.
   9. Cut your grocery bill. The first step to cutting your grocery bill is to use a grocery shopping list. When you do go shopping, try to select non-brand items. Many of the non-brand items are made by name-brand manufacturers. Buy less meat. Meat is typically one of the most expensive grocery items you can buy. Try to purchase items on sale, but only if the item is on your list. You can also use coupons to save some money on groceries. Most grocery stores even have their coupons online on their mobile app.
      

Where to Keep Your Emergency Fund?

Where you decide to keep your emergency fund depends on you and your specific situation. Your funds need to be in a place that is accessible, safe, and in a place where you are not tempted to spend it on regular expenses.

Let's look at a few options for where to keep your emergency fund. Choose one that makes the most sense for you and your family:

• • Savings account in a bank or credit union – If you currently have an account with a bank or credit union, you could open a separate, dedicated savings account to fund your emergencies.
  • Cash – Keep cash-on-hand is another option for your emergency fund. Cash is easily accessible, but keep in mind that it can also be stolen, lost, or even worse, destroyed.
  • Prepaid Card – A prepaid card is also an option to keep your emergency fund. You can load money onto a prepaid card. This type of card is different from a credit card because you can only spend the amount on the card and no more. As with cash, a prepaid card can also be stolen, lost, or destroyed.

Can Building an Emergency Fund Be a Bad Idea?

Some people feel they are not in a position to build an emergency fund. They may have too much debt, don’t have enough left over at the end of the month to set aside, or many other reasons. Moreover, you can’t ignore your essential bills. Paying credit card debt, student loan debt, or any loan debt may be a priority before building an emergency fund.

There is a possibility that you can spend less money or cut back on certain living expenses in order to pay your debt faster so you can begin building an emergency fund. You should determine what is best for you and your family and calculate the risk of not having an emergency fund.

The Bottom Line

It’s not fun thinking about worst-case scenarios. Everyone should have an emergency fund for those unexpected financial situations. Having a fund could keep you from having to go into debt even more and maybe just a little less stressful. Use these 9 ideas to start your emergency savings fund today!