Setting up a dedicated saving or emergency fund is one essential way to protect yourself, and it’s one of the first steps you can take to start saving. By putting money aside—even a small amount—for these unplanned expenses, you’re able to recover quicker and get back on track towards reaching your larger savings goals.

We’ve all experienced unexpected financial emergencies—a fender bender, an unexpected medical bill, a broken appliance, a loss of income, or even a damaged cell phone. Large or small, these unplanned expenses often feel like they hit at the worst times.

The tip and advice below will help successfully build your own emergency fund. First, what is an emergency fund?

• What is an emergency fund?
• How much money should you have in your Emergency Fund?
• Why should you Build an Emergency Fund?
• How long should it take to build an Emergency Fund?
• 5 Simple Ways To Speed-Up Your Emergency Fund Building
• Is 1000 Enough for Emergency Fund?
• Where should I put my Emergency Money?
• How to Build an Emergency Fund

What is an emergency fund?

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.

Read Also: How to Start an Emergency Fund

In general, emergency savings can be used for large or small unplanned bills or payments that are not part of your routine monthly expenses and spending.

The COVID-19 pandemic is draining Americans’ savings and money for emergencies is dwindling. In a summer Bankrate survey, 21 percent of Americans said they had no emergency savings whatsoever. Moreover, 35 percent of Americans said they have less emergency savings now than prior to the coronavirus pandemic.

Not being able to pay for emergency expenses can lead to crushing debt and a pile of unpaid bills. That’s why the time to start saving for an emergency is today. If you save while things are good, you will be prepared when the unexpected happens. Having a savings account dedicated to an emergency can make a stressful situation easier to handle.

How much money should you have in your Emergency Fund?

Most financial experts recommend that you have somewhere between three months and six months of basic living expenses in your emergency fund.

The three-month guideline is generally recommended for those who are in salaried positions and have more secure employment. The six-month recommendation is for those who have less stable employment or earn variable incomes. 

If you fall into the second category, an income reduction may even be more likely than a complete job loss. An emergency fund can be used to help cover your basic living expenses during a time when your income has been reduced.

Naturally, you’ll need to rebuild your account when your income increases. The basic idea will be to build up the account during high earning months, in preparation for low-income months. 

Why should you Build an Emergency Fund?

Having a well-funded emergency fund is more important than just providing funds for a potential disruption of your income. Apart from covering basic living expenses, your emergency fund will do the following: 

Prevent you from needing to liquidate retirement accounts

Retirement accounts are the primary investment asset of most people. And for many, it’s their only source of significant savings. For that reason, they may be tempted to tap those funds in an emergency. But doing so invites tax consequences.

At a minimum, you’ll need to pay ordinary income tax on the amount withdrawn. But if you’re under 59 ½, you may also be subject to a 10% early withdrawal penalty.

That may solve a short-term need for cash, but it will create an additional tax liability the following year. A well-stocked emergency fund will prevent that outcome. 

Avoid the need to liquidate investments

If you need to sell stocks or funds to raise cash in an emergency, one of two outcomes will be likely:

1. You’ll sell those investments at a loss, locking in the loss at the same time, or
2. You’ll sell the investments at a gain, creating a capital gains tax liability.

Once again, a well-funded emergency fund will eliminate the need to sell investments in an emergency.

Minimize the need to tap credit lines

Many investment advisors are telling people to be “fully invested”. The rationale is that since returns on stocks are so much higher than fixed-income investments, keeping money in savings is a guaranteed money loser.

From a purely financial standpoint, that advice is spot on. However, many people in that situation rely on credit lines to act as an emergency fund. The problem with that strategy is that it simply pushes the need for cash into the future. Sure, your immediate need for cash will be satisfied by the credit lines. But you’ll need to pay them back later on.

In that way, using credit lines instead of an emergency fund simply transfers the cash needed from the present into the future. You’ll either need to repay the money in one or two large lump sums, or you’ll be adding a new and semi-permanent monthly payment to your budget. 

Covering sudden expense related emergencies

Throughout this article, we emphasize an emergency fund amount based on covering a certain number of months of basic living expenses. That implies the primary purpose of an emergency fund is to cover the loss of your income. But while that may be the single most important purpose of an emergency fund, it’s hardly the only one.

 Other emergency situations requiring tapping your emergency fund could include:

• A large, unexpected and uncovered medical expense.
• A major car repair, such as the one that runs into several thousand dollars.
• Helping a friend or family member in an emergency.
• Facing an unexpected legal entanglement that will require paying an attorney upfront.
• A sudden and unexpected need to travel, perhaps to take care of an ailing family member.
• A major home repair, not covered by homeowner’s insurance, or where the insurance reimbursement is seriously delayed.
• An identity theft situation that causes you to lose access to your credit lines.
• You receive a notice from the IRS informing you that you owe several thousand dollars in back taxes.

These are just some of the situations that could arise, forcing you to need extra cash in a hurry. If you spend a little bit of time thinking about it, you’ll realize there are many more. A well-funded emergency fund will keep you insulated from each of these situations.

How long should it take to build an Emergency Fund?

In personal finance, creating an emergency fund is one of the most important financial steps you can take. Not only does it provide you with stability and peace of mind, but it allows you to play offense in your financial life, instead of operating from a standpoint of fear and restriction. Though, like anything worth pursuing, building an emergency fund takes time.

And that leads me to a very important question: how long should it take you to build an emergency fund?

In short, it should take you between 6 and 18 months to build an emergency fund. As a rule of thumb, you should expect to spend twice as many months saving, as your emergency fund will cover. So, for example, you should plan to spend 12 months building a six-month emergency fund.

Whereas, if your goal is to build an emergency fund that covers 3 months of your living expenses, you should expect to spend 6 months saving.

Now, like we mention, this is just a general rule of thumb. For some people, it might take a little longer than that, while for others, it might take significantly less time. Since everyone’s financial situation is unique, it would be foolish for me to give you a specific timeline.

That said, since saving an emergency fund is so critically important to your long-term financial well-being, the faster you build one, the better off you’ll be. But let’s be honest, building an emergency fund isn’t the most exciting financial task to pursue. Therefore, like ripping off a Band-aid, the sooner you get it out of the way, the sooner you can start working toward your more exciting financial goals.

5 Simple Ways To Speed-Up Your Emergency Fund Building

1. Keep Your Emergency Fund At A Different Bank

Of all the saving tips we ever recommend here at Be The Budget, this is, by far, one of our favorites. If you want to shorten the amount of time it takes you to save an emergency fund, then you should start by setting it up at a completely separate bank than you operate the rest of your financial life.

This will keep your emergency fund out of sight, and therefore, help to keep you from dipping into it, and undermining your efforts.

After all, there’s really no point in saving money if you’re just going to pull the money out and spend it.
If you’re looking for a good place to set up a savings account, we recommend an Axos High-Yield Savings account.

With a great interest rate, no monthly maintenance fees, and no minimum monthly balance requirements, this savings account is a perfect fit for an emergency fund. Plus, you can open an account entirely online in about 15 minutes.

2. Get On a Written Budget

After setting up an emergency fund at a separate bank, the very next thing you should do is get on a written budget. In fact, whether you are saving for an emergency fund or not, this is something you should do as soon as possible.

You see, budgeting allows you to control every area of your financial life. It helps you find expenses to cut (more on that next), manage your spending, see the long-term impact of your short-term decisions, and improve your overall financial situation.

In essence, it gives you complete control of your financial life. And the more control you have over your money, the quicker you will be able to save up an emergency fund.

3. Cut Your Spending

Ok, now that you’ve set up a separate bank account, and a shiny new budget, if you really want to speed up your savings, you should cut your spending to the bone.

We are talking about dining out, shopping, vacations, everything that you can possibly cut. It might seem a little extreme, but seriously, building an emergency fund is one of the most important things you can do. And the more spending you are willing to cut, the less time you will have to spend building it.

Think about it like this, for every dollar you spend that could otherwise go toward your emergency fund, you are putting your more exciting financial goals on hold a little while longer. So, my advice is to just go all-in and get it out of the way as fast as possible.

Once you have an emergency fund in place, and you no longer have to worry about making ends meet in the event of a ‘rainy day’, you will have much more financial freedom to do things that make you happy.

4. Sell Your Stuff

Let’s be honest, we all probably have a few items sitting around gathering dust. Whether it’s an old winter coat in the hall closet, a bunch of camping gear that you haven’t used in the last 10 years, or some clothes that don’t fit anymore, one of the fastest ways to speed up your emergency fund savings is to sell your stuff.

Now, like cutting your expenses, you could go all-in on this as well. I have heard of people selling their furniture, selling everything from their storage unit, and even selling their car in order to get their emergency fund out of the way.

There’s just something so wonderful about having the financial security of an emergency fund. And one of the fastest ways to get there is to sell your stuff.

Honestly, at least in my experience, this can be pretty therapeutic.

5. Supplement Your Income With A Side Hustle

As we mentioned at the beginning of this article, building an emergency fund can take between 6 and 18 months. But if you are the kind of person that doesn’t like to sit and wait that long to get the results you want, then one of the best things you can do is start a side hustle.

Now, to be honest, if saving an emergency fund is your main focus, then we would recommend getting a part-time job over starting a business of your own. For one, the income of a part-time job is usually more predictable. And two, it won’t take as long to start earning enough money to make a big difference in your savings.

That said if you have goals for your financial life that extend beyond your emergency fund, and you want to scratch your entrepreneurial itch, then starting a side business might be perfect for you. Just make sure you start a business that doesn’t require much, if any, upfront capital to get going. Seriously, the goal is to save money for emergencies, not spend it on business startup costs.

One of the best ways to do this is by offering a service, rather than a product. Service-based side businesses like: social media management, freelance writing, tutoring, or teaching music lessons, don’t require you to spend any money to get started. You just have to put in some sweat equity, which won’t pull anything away from your emergency fund savings.

Saving an emergency fund is one of the most critical financial steps you can take. Though, like anything worth pursuing, it can take time to achieve. In fact, it can take anywhere from 6 to 18 months to build a quality emergency fund.

Is 1000 Enough for Emergency Fund?

People tend to latch on to the wisdom of the most prominent experts in any field. In the case of personal finance, the most famous expert is probably Dave Ramsey. One of his key pieces of advice is to save $1,000 in an emergency fund before paying off any high-interest debt.

That’s good advice, but some people end up taking it the wrong way. They assume that $1,000 is the most they need to save, rather than a baseline. For some people, that might be enough – for others, it’s not even close.

The amount you need depends entirely on your personal circumstances. Here are some examples of when $1,000 is adequate, when it falls short, and how to make the best use of what you have.

When $1,000 Is Enough

Many experts recommend saving three months’ worth of expenses in their emergency fund, but not everyone can afford that. For people who have high credit card debt or low incomes, $1,000 might be all they can save without compromising other priorities.

That amount is enough to cover most emergencies, like a sudden repair on your car, a trip to urgent care or an emergency vet visit. $1,000 will probably cover the bill in each of those cases, and possibly with some money left over.

When it comes to saving for an emergency, the goal should be to minimize the long-term damage an unexpected expense can inflict on your finances. Even a small emergency fund will save you from the worst-case emergency scenarios – borrowing money from friends or family, taking out a payday loan or pawning off an important possession.

When $1,000 Isn’t Enough

If you have kids, are the sole provider of your family, are self-employed or own a home, $1,000 probably isn’t going to cut it. As anyone with a mortgage knows, the water heater doesn’t care how much you have in your emergency fund when it decides to break.

Self-employed people need more than $1,000 in an emergency fund because their business income can be sporadic and inconsistent. Having an insufficient amount saved can mean taking on jobs that don’t align with your business, or even being forced back into a traditional job to make ends meet.

Similarly, if you work on commission and your salary depends on how many sales you make, $1,000 might be inadequate. Any time you have inconsistent or variable income, you need to try for three to six month’s worth of expenses.

Parents should also try to have a more robust savings account. When you have other people relying on your income, the potential for an emergency expense increases substantially. You don’t want to be stuck choosing between paying a medical bill and putting food on the table.

If you have pets, especially those who are older or have chronic health problems, we recommend having at $2000-$3000 in your emergency fund. Some vet offices only accept cash and require payment before performing an operation, so easily-accessible funds are a must.

If you’re paying off a lot of debt and still have extenuating circumstances, like kids or an unstable job, don’t raid your emergency fund to reach the finish line faster. Reaching your financial goals is like climbing a mountain, and an emergency fund is like your first aid kit. Sure, you may not need it – but do you really want to take that chance?

How to Stretch Your Emergency Fund

If you only have $1,000 and suffer a significant emergency, like job loss or emergency surgery,  there are a few basic strategies you can employ. For those with federal student loans, you can call and put your loans in deferment or forbearance until you get settled.

You can also switch to an income-based repayment plan, which could reduce your payments to $0. If you have private student loans, call the provider and ask what your options are.

Utility companies sometimes provide emergency assistance if you call and ask. Even landlords can be understanding about delaying rent in times of crisis. Make sure to call and ask before you miss a payment. That will show you’re trying to be responsible and considerate.

Where should I put my Emergency Money?

With thousands of dollars in play, you’ll want to make sure you keep your emergency fund parked in a safe spot and that you’re getting a return on your cash reserves. But since this cash needs to be readily accessible in case you need it, you have to choose where to keep your emergency fund wisely.

When deciding where to keep your emergency fund, consider these four different accounts that offer easy access and benefits:

1. High-yield bank accounts

A high-yield savings account might be the best place to keep your emergency fund. Not only are your funds accessible in this type of bank account, but you’ll also earn interest on your deposits. To find the right high-yield savings account for your emergency fund, look for options with a competitive interest rate and no monthly fees or balance requirements.

Since certain banks offer “welcome bonuses” for new customers, you can also score an upfront benefit if you meet the terms and requirements.

2. Money market accounts

When deciding where to invest your emergency fund, don’t forget about money market accounts. Money market accounts are similar to savings accounts in that they can offer higher yields. You can open a money market account online or at a local bank, then access your money through web-based account management or at an ATM.

Since money market accounts are easy to use and your funds can be withdrawn at any time, they can be a good option for your emergency savings. However, be mindful of money market fees that could chip away at your returns. As with any other account, it pays to shop around and compare fees and features before selecting where to keep your emergency fund.

3. Certificates of deposit (CDs)

Certificates of deposit, or CDs, offer a fixed rate of return for a specific length of time (e.g., 1.30% APY for 24 months). Since your rate of return is guaranteed, opening a CD could be a way to earn extra interest on your emergency fund.

Since CDs “tie up your money” where it’s somewhat out of reach, you may have to pay a penalty to close your CD account early to access your funds. To combat this, many people opt to “ladder” their CDs—a term that describes opening multiple CDs with different maturity dates so a certain amount of cash is available at all times.

4. Roth IRA

While a Roth IRA may not seem like the ideal spot to invest your emergency fund, parking your cash there can make sense. By investing your funds conservatively, you may secure higher earnings than a traditional savings vehicle—without taking on too much risk.

A risk you’ll need to consider if you keep your emergency fund here? Your Roth IRA could lose value. Choosing conservative investments for your Roth IRA could help mitigate this risk, but it may not shield you from losses altogether.

How to Build an Emergency Fund

1. Plan your budget 

There’s no universal recipe you can follow when you want to build an emergency fund. It depends on your income, your savings, how much you spend every month, and what types of emergencies you need to prepare for. An often-quoted rule is to save as much as you would need to manage six months of unemployment.

However, for many of us, this goal is unrealistic. It’s something we should all strive for, of course, but you need to take your actual budget into account when preparing for a crisis. That’s why planning your budget is the first step in building an emergency fund.

After all, if you don’t know how much you’re spending and how much you could be saving, you won’t be able to put money away for hard times.

Use a spreadsheet to write down how much you spend on:

Fixed costs:   

• Rent/mortgage payments
• Recurring debt payments
• Any ongoing medical services or medication you require
• Utilities
• Fuel for your car or public transportation passes
• Insurance
• Food
• Household supplies (cleaning, maintenance)
• Clothing & shoes
• Personal care essentials (shampoo, soap, toothpaste, toothbrush, moisturizer, etc.)
• Childcare, petcare

Flexible costs:   

• Entertainment (cable, streaming and gaming subscriptions, events)
• Dining out
• Non-essential food & household items (snacks, drinks, beauty products, etc.)
• Gym memberships
• Newspapers, magazines, books
• Vacations
• Gifts
• Ridesharing services or cab rides

2. Set goals based on real scenarios 

Once you’re done organizing your daily and monthly spending, it’s time to set goals for your emergency fund based on the crises you could face:

• On a national level, the most likely effect of a crisis would be massive job losses and loss of resources. Economic downturns, pandemics and international or domestic conflicts can lead to these issues.  
• On a regional level, the most common type of crisis is a natural disaster. Depending on your area, you could face hurricanes, wildfires, landslides, and more.  
• On a personal level, you should consider job loss and health problems.

These scenarios each come with their own tricky calculations. While a pandemic will likely last a few months, downturns can go on for years and are likely to happen around once per decade. When it comes to natural disasters, if you live in a high-risk area, the worst that can happen is not only losing your job but losing your home as well.

Building an emergency fund with enough savings for around six months would be ideal for the harshest of times. However, if you aim for just enough to get you through a short rough patch, you can start with one or three months’ savings as a goal, and work your way up from there.

Keep in mind you should build an emergency fund separate from a rainy day fund. If you can, you should manage repairs to everyday items or smaller medical expenses with a rainy day fund, where you’ll keep less money on hand.

If you’re having a hard time figuring out how much you can save based on your income and spending, you can get financial advice from experts for free. GreenPath Financial Wellness is a national nonprofit that helps people around the country. They can help you get out of debt, make housing decisions and manage your money.

3. Start saving

You know how much you’re spending and what to prepare for. Now comes the real question: how will you save the money you need to build an emergency fund? The truth is you will probably need to cut back on some of your spendings if you’re serious about saving. However, if and when the worst happens, you’ll be grateful to yourself for having taken these steps to secure your future.

Read Also: How to Manage Money Successfully as a Couple

How to cut back on spending  

The first area you will cut back on is the flexible spending section of your budget:  

• Entertainment: cancel any subscriptions you don’t use often. For example, if you haven’t opened a streaming app for a week, you might not need it after all. When it comes to gaming, buy physical copies instead of digital ones so you can swap or resell them when you get bored.
• Dining out and ordering in: if you can cook at home, cut down on eating out and ordering in as much as possible, and go for recipes that don’t require unreasonably expensive ingredients. Plenty of food websites have excellent recipes and advice for home cooks, even on a beginner level.
• Non-essential food items: eat fewer snacks, your bank account and your body will thank you.
• Gym memberships: find ways to exercise outdoors or indoors, without going to the gym. If you need guidance, free online resources will help you manage your exercise routine.
• Beauty and personal care products: try to find cheaper alternatives to the beauty products you use. Try out testers in-store to see if you can find a different brand for what you need. Also, compare reviews online and look for products with similar ingredients to what you’re currently using.
• Vacations: book your holidays early to find the best possible deals.
• Transportation: use public transit instead of ridesharing services or cabs whenever you can. This will come easier if you’re in a bustling metro, like if you’re living in an apartment in Austin.

These tips are a great starting point in building an emergency fund and can save you a pretty penny, but you should consider trimming down your fixed costs as well:

• Look for better deals in every area you can. How long has it been since you looked at cable providers? Or since you checked out other healthcare and insurance plans? You should regularly reassess your options to make sure you’re getting the biggest bang for the buck.
• Replace cheap things that break quickly with pricier but sturdier items. Going for fast fashion or cheap furniture might seem like a budget-friendly option, but buying a few high-quality items that will last for years will save you a lot of money in the long run. You can also find quality clothing and furniture in thrift stores, where you can often snatch up one-of-a-kind pieces with minimal spending.

Summary

Your emergency fund is there to protect you and your family from financial stress caused by unexpected expenses. While you’re not using it, though, your account needs a safe place to grow. Stashed in a high-yield savings account, certificate of deposit (CD), money market account or even a Roth IRA, your emergency fund can continue growing until the day you need it.