How to Build An Emergency Fund

Why is an emergency fund so important and how do you build and maintain one?

Your son’s foot slips while backing into the driveway and he crashes right through the garage door.  A water pipe bursts and floods your basement.  Your furnace dies in the middle of winter. Your company is downsizing and you suddenly find yourself out of a job.

Life is full of financial emergencies like these, which is why it’s smart to establish an emergency fund to cover unexpected expenses or a sudden loss of income.

But how do you go about setting up an emergency fund?  Where do you get the money from?  Where do you keep it?

Have no fear…we’re going to answer all of your questions about emergency funds below.

Emergency Fund

How Big of an Emergency Fund Do You Need?

There are many opinions as to the optimal size of an emergency fund.

One common rule of thumb is that it should be big enough to cover three to six months of your living expenses.  Some people suggest you need at least a year’s worth of living expenses while others believe you can get by with just $1,000.

We recommend a minimum of three months expenses, but ultimately the size of your emergency fund will depend on your own personal circumstances and monthly bills. 

If you’re single, rent an apartment in a state where the cost of living is very low, and don’t have many expenses you can probably get by with a minimal emergency fund for starters. But if you’re like me with a family of five to support and you live in one of the most expensive states, you’ll want a much bigger emergency fund.

Of course if you did suffer a long-term financial emergency, such as a job layoff, you’d want to trim your expenses to the bare minimum and start living stingy to make your money last as long as possible.  You don’t want to miss mortgage payments, so it could be time to eliminate your cable TV package and stop eating out every Saturday night.

Do you have any dependents?  The more people who are relying on your paycheck the larger your emergency fund should be.  This is not only because you have more mouths to feed, but also because there are more opportunities for an emergency to take place.  My kids have made several trips to the emergency room and while none of them were particularly serious they were all very, very expensive.

How to Build An Emergency Fund

Perhaps the most frustrating part of creating an emergency fund is finding money to get it started, especially if your budget is already stretched to the limit.  Here are some tips to help you build up an emergency fund no matter what your current resources are.

Start Small

Putting away $20 per paycheck may seem futile at first, but it is important to get the ball rolling and start saving something.  Thanks to compound interest, even small amounts will grow over time.  And you can always increase your savings amounts when you can.

Unexpected Windfalls

Get a bonus at work or a fat tax refund check?  Put it towards your emergency fund instead of spending it, or at least drop a portion of it into your emergency fund before it is all gone.

Get a Part-Time Job

It doesn’t have to be a lifetime commitment, but a second job can give your emergency fund a healthy boost.  To stay motivated you can set a goal such as, “I’ll work two jobs until my emergency fund account reaches $5,000.”

Start a Side Hustle

There are tons of things you can do to earn extra money that you can then use to build an emergency fund. Consider taking online surveys, babysitting, walking dogs, or starting your own blog.

Sell Stuff You Don’t Need

We all have stuff stored around the house that we know we’ll never use again.  Why not turn your trash into cash?  You could hold a yard sale, sell it to a consignment shop, or sell it online at sites like eBay or Craigslist.

My wife found a neat Facebook group where moms from our area post items for sale.  She’s already sold a handful of items and made about a hundred bucks on stuff I was going to throw away.

Dig Through Your Couch Cushions

Keep a jar at home and empty all the spare change from your pockets into the jar every day.  You’d be surprised how quickly it will add up and once the jar is full you can deposit it into your emergency fund.

Where to Keep Your Emergency Fund

Your emergency fund should be kept where it can earn some interest and where you can access it quickly and without penalty.  It also needs to be somewhere safe.  Remember, your emergency fund is for saving, not investing.

Your best option is to open up a high-yield online savings account.  This way your money will earn a bit of interest but you’ll still be able to access it when you need it. Ally, Discover Bank, Betterment, and Capital One 360 are all good options for your emergency savings fund.

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