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Easy tips to build your emergency fund to make it through those unforeseen expenses
What the finance is an emergency fund? An emergency fund is a separate "pot of money," either an actual savings account that you don't access or a theoretical chunk of your cash that you save for small, unforeseen emergencies like home maintenance, car repairs, or minor medical bills.
Is an emergency fund different from a cash reserve?
We consider having an emergency fund the first step toward creating a larger cash reserve.
Your emergency fund is a smaller fund, typically around $500, to cover minor financial emergencies like a new car battery or an urgent care visit. Oftentimes, we need to start small, so the first step is to build your emergency fund and then move on to building your cash reserve.
Your cash reserve is your larger fund, typically three months of your typical living expenses, set aside for unforeseen and costly life changes like medical issues, significant home repairs, or loss of income if you lose your job. We recommend contributing to this larger fund after establishing your emergency fund.
How much to save for your emergency fund
Many financial professionals will recommend saving $500 in your emergency fund as a first step toward cash savings. The purpose of this fund is to help you cover small emergencies.
Where to save your emergency fund
Having a substantial amount of liquid (accessible) cash in your wallet, under the proverbial mattress or in a safe, is a bit risky and most likely not a good idea. Even though $500 isn't a TON of cash, it's still a good chunk of money to have lying around.
That said, leaving all of your cash in an illiquid CD won't help in an emergency, since those accounts often cause withdrawal penalties and fees.
The best answer might just be a standard bank account. You can stash your emergency fund in your savings account or a checking account. You don't have to create a separate account for this fund unless you decide to keep your emergency fund with your cash reserve. The best part of savings accounts (versus checking accounts) is that they pay interest, plus you can access this cash whenever you need it without penalties and fees.
How to save for your emergency fund
Depending on your income and cash flow, $500 may or may not be a big deal. For many of us, it is! Some of us may already have that cash to put aside, but others don't—especially if high-interest debt, student loans, children, or aggressive retirement savings are part of the equation.
Nevertheless, a rainy day fund can help save your behind in emergencies, and we highly recommend creating one.
Before we start, if you have high-interest debt, we recommend you tackle that first.
Your action plan for building your emergency fund
Try the Budget Calculator in our app! We'll coach you through identifying how much money you have to save once you account for your living expenses and debt payments. We'll help you create a stick to a monthly savings goal to reach your ultimate emergency fund amount.
Here's a quick review of how we'll walk you through the process of creating an emergency fund:
Determine what you spend on a monthly basis.
Your first step is to know your cash flow and budget. Don't have it set up? No problem. It's time to create your budget.
Set a goal.
We recommend saving $500 in your emergency fund. You can choose to save more, if you'd like!
Create a habit of saving.
Once you create your budget using the Budget Calculator in our app, we'll create a monthly bucket for you to save toward this fund. Of course, you'll feed this fund after you account for your living expenses and debt payments. We'll coach you through all of that!
Cut your expenses.
We'll coach you to identify the difference between wants, needs, and savings so you know how to prioritize your spending. Ultimately, we help you determine where that next dollar will go.
Keep the change.
Take a jar in your home and drop any excess change in it. At the end of each month, deposit it into your savings account.
Continually assess and adjust contributions.
Using our Budget Tool in our app, you'll easily be able to track how much money you're saving each month and adjust when necessary or possible.
Get started
Time to visit our Budget Tool in our app and start saving for your emergency fund!