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How to Build An Emergency Fund

An “emergency fund” is a savings account you stash money into to prepare for financial emergencies. It can provide a protective barrier between you and stress when unexpected expenses, such as car repairs, healthcare costs, or vet bills, arise. Because of this, everyone needs an emergency fund, regardless of who they are or what their normal financial situation is like.

a red and white piggy bank on a wooden table

Why Do I Need An Emergency Fund?

Building an emergency fund should be a top priority for many reasons, including:

  • It can cover financial emergencies as soon as they come up. This is the key reason why anyone should build an emergency fund, and its importance can’t be overstated! An emergency fund can help you pay for eventualities without disrupting your usual budget or resorting to costlier alternatives like high-interest credit cards or payday loans.
  • It helps you prepare for the future. Unfortunately, recessions are always possible in our economy, and they bring several adverse effects with them, including pay cuts, job losses, and prolonged unemployment. An emergency fund can help you stay afloat in lean economic times.
  • It can help you maintain peace of mind. Financial emergencies are a normal part of life, but that doesn’t stop them from being frightening. Even the prospect of them can cause stress and anxiety! An emergency fund helps to mitigate this; when you’re financially prepared for anything, you won't worry as much.
  • It can protect your credit score in difficult times. If you can’t afford an unexpected expense out-of-pocket, you may need to use a credit card to pay for it, which increases your credit utilization ratio. Or you might pay for it out-of-pocket with money you’d normally use to pay your credit card bills, resulting in late or skipped payments. Either of these scenarios can negatively affect your credit score. If, on the other hand, you have an emergency fund, you can avoid swiping your card or disrupting your usual budget, which helps you maintain your score.

That’s great, you may be thinking. But how do I build an emergency fund? And how big should it be? Here are eight steps to help you figure it out.

8 Steps to Saving

1. Determine How Much to Save

The ideal size of your emergency fund depends on a few things, namely your current ongoing expenses and any debts you’re repaying. Experts generally agree on these rules of thumb:

  • If you have a lot of high-interest debt and/or no savings, try to save $1,000 in an emergency fund, then focus on repaying debt after that.
  • If you have little or no debt, commit to saving three to six months’ worth of living expenses. A “living expense” is anything regularly included in your budget, such as your rent or mortgage, transportation costs (including car payments and gas), utilities, and a modest amount for food, clothing, and entertainment.

For more considerations on whether to pay down debt or save, check out our guide to managing both priorities! And once you’ve set a savings goal, write it down and put it somewhere you can see it regularly, such as your wallet or the notes app on your phone. This will provide a steady reminder of what you’re hoping to achieve.

2. Figure Out Where to Keep It

Your emergency fund should go somewhere safe, secure, and easily accessible, and ideally should generate some form of interest, particularly in times of nationwide interest hikes. Finding an account that has it all may seem difficult, but it’s certainly not impossible!

Here are some options you should consider, as advised by top financial experts:1

  • For the best combination of accessibility and interest, consider an online savings account or money market deposit account with your current bank or credit union. They offer competitive interest rates and allow up to six withdrawals per month - enough to help you access your money when you need it but not so much that you’ll be tempted to spend unnecessarily. Deposits up to $250,000 are usually insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA), so you can rest assured that your money is protected.
  • Another option is to open a high-yield savings account at a different bank than your main financial institution. Neobanks, or banks that operate entirely online, can be a great option for this, as they tend to offer higher interest rates than their traditional counterparts.2
  • You could also consider a money market mutual fund. These are low-risk investment accounts that generate interest over time, though the earnings are typically very small compared to other options.3

3. Divide Your Big Goal Into Smaller Goals

A gigantic savings goal can seem overwhelming, so make it more manageable by breaking it into smaller, more achievable increments. For example, if your emergency fund goal is $10,000, commit to saving $500 a month. Note that your smaller goal should be large enough to challenge you and help you reach your ultimate goal sooner rather than later, but it shouldn’t be so large that it seems unattainable or doesn’t make sense for your budget.

4. Set a Budget That Prioritizes Saving

Setting a goal is important and figuring out where to store your funds is critical. But without a way to guide your spending and encourage saving, you may not have much money to put in it! That’s where budgeting, particularly a budget that prioritizes saving, comes in.

Simply put, a budget requires you to look at your regular income and make a plan for every dollar you spend and save. If that sounds scary, don’t panic; modern technology has given us many tools that take the pain out of budgeting and can even make it - dare we say it - fun.

Here’s how to get started with budgeting:

  • Choose a monitoring tool. You have several options, from feature-packed money management apps to computer spreadsheets to a regular pencil and paper. Select the option that works best for you, and remember that you can always try something new or combine different tools if your first attempt doesn’t work out.
  • Understand your cash flow. To do this, add up your after-tax income, making sure to account for all possible sources (i.e. your job, any side work, alimony, child support.) Then, write down all of your regular expenses, from the large (i.e. rent, car payment, utilities) to the small (i.e. takeout meals and coffee, movie tickets, and other incidentals.) You should also include your smaller monthly goal from the previous step.
  • Monitor your incoming and outgoing cash. Track every expense using the tool you selected. Periodically - say, every other day or once a week - look over your recent purchases, compare them to your incoming cash flow, and make any necessary changes in spending to align your income and expenses.
  • You should also consider setting up automatic transfers from your checking to your chosen savings account. This takes the work out of the savings process by moving money from your checking account for you, without any required action on your part! There are a few options for automatic transfers, including having money moved from your checking account on each payday or using an app to a) “round up” each purchase you make, then b) move the spare change from your checking account to your savings.

5. Tackle Existing Debt

A recent report from Experian revealed that the average American carries about $5,525 in credit card debt.4 Complicating matters further, that amount is spread over an average of three different credit cards, each with its own monthly due date and interest rate.5 It’s not surprising, then, that millions of people struggle to get out of debt, constantly throwing money at credit card balances that never seem to get down to zero.

The money you spend on repaying credit cards could be used for your emergency fund instead. Free up that room in your budget with one of these time-tested methods for eliminating credit card debt:

  • The avalanche method. Otherwise known as “laddering,” the avalanche method prioritizes debt repayment according to which debts have the highest interest rates. This is a good option if your main priority is saving money on interest.
  • The snowball method. The snowball method asks you to focus on paying off your credit cards in order from your smallest debt to your biggest. This method works well if you’re motivated by the satisfaction you get from eliminating entire debts and aren’t as concerned about interest.
  • Debt consolidation. When you consolidate debt, you can take out a personal loan and use the funds to pay off all your credit cards. Then, you have only one loan to worry about and can make one payment per month until it’s fully paid off. This has multiple benefits: it rolls many separate monthly payments into one lump sum, gives you a set payoff date (as opposed to keeping you in the cycle of credit card debt), and can help you save money thanks to personal loans’ fixed interest rate. 

Get more tips with our guide to paying off credit card debt!

6. Bring In Some Extra Income

The more money you make, the more you can possibly save! As of 2021, there were 7.5 million Americans earning extra money through “side hustles,” or sources of income other than their main jobs.6 Here are some of their favorite ways to make more money:

  • Do freelance work. Got a marketable skill? Online marketplaces like Upwork, Freelancer.com, and Fiverr make it easy for writers, graphic designers, programmers, and more to connect with freelance clients, complete projects for them, and get paid for their work. Pay can vary wildly from one project/client to another, but if you have the time and the talent, you can make extra money and maybe even sharpen your skills.

  • Sell items you no longer want or need. Whether it’s clothing you’ve outgrown, the stroller you used while your now-adult child was a baby, or the treadmill doing double duty as a coat rack, we all have stuff lying around that we don’t need anymore. You can put it up on eBay, Facebook Marketplace, or Decluttr, or go the traditional route and host a good old-fashioned yard sale. Regardless of the avenue you choose, this is a great way to fill up your wallet while freeing up space in your house.

  • Ask for a raise or promotion. Of course, there’s always the option of making more for doing the same work at your current job. If you’ve established a good rapport with your supervisor and feel confident in your performance, consider asking for a raise or promotion.

    This conversation can be intimidating, so don’t go in blind! The career gurus at Glassdoor say that before you initiate a discussion like this, you should have an exact amount in mind; come prepared with examples of when you’ve gone above and beyond in your job; and time the conversation appropriately (that is, when you’ve had a recent success and your manager is in a good mood.) And of course, speak confidently and enthusiastically while expressing gratitude for what you currently have at your job.7

Making more money is easier said than done, so be patient with yourself as you explore moneymaking options and find the one(s) that work for you.

7. Understand What Counts As An “Emergency”

It stands to reason that an emergency fund is for, well, emergencies. But what is an “emergency,” really? And what differentiates an emergency from standard, run-of-the-mill living expenses?

A good rule of thumb is if a situation poses a threat to your financial stability (both long-term and short-term) or your health, it’s an emergency and should be paid for through your emergency fund; if it doesn’t, it’s not and should be funded through your regular budget. Common financial emergencies that justify withdrawing from your fund include:

  • Car and/or home repairs. A study from The Motley Fool found that the average American household spends $4,958 on home repairs per year,8 while a report from AAA shows that car repairs cost an average of $500 to $600 apiece.9 As these expenses are tied to your ability to live, cook, sleep, and travel safely, you’re definitely justified in pulling from your emergency fund to cover them!
  • Medical expenses. There’s a lot of conversation about the cost of healthcare in the U.S. - and justifiably so, as the average American spends about $11,172 on healthcare each year.10 That number is even higher for those who need prescription medications, surgeries, or intensive treatments and procedures. It can be hard to predict when and if steep healthcare costs will arise, so it’s a good idea to have funding on hand to help pay for them as needed.
  • A pay cut or job loss. The tumult of the last few years, particularly the COVID-19 pandemic, has shown that pay cuts, job loss, and unemployment - perhaps even prolonged unemployment - can happen to anyone at any time. An emergency fund provides a “safety net” until you can make more money and/or land on your feet at a new job.

8. Reward Yourself As You Progress

If you want your budget to succeed, you have to spend money on treats, rewards, and fun! Small rewards trigger the release of a feel-good chemical in your brain called dopamine. The pleasant effects of the dopamine encourage more of the behavior that triggered its release; and so, when you reward yourself for minor successes, you can incentivize yourself to save more and continue reaching bigger and bigger victories.

Your rewards don’t need to be expensive or extravagant to be worthwhile! Try one of these suggestions:

  • Take a staycation. Enjoy the comforts of your own home or rent an affordable Airbnb near where you live. Then, unplug from work for a day or two and enjoy low-cost activities like hiking, free museums, and inexpensive restaurants, coffee shops, and breweries.
  • Do something creative. Let your artistic side out with an adult coloring book, craft kit, or musical instrument; or if you’re feeling social, get some friends together for a “paint and sip” night.
  • Treat yourself to coffee and “me time.” Bring your journal, a novel, or a crossword or Sudoku book to your favorite local coffee shop. Buy your favorite beverage, then grab a table and enjoy a few peaceful hours.

Consider Your Credit, Too

As you build your emergency fund, monitor the other aspects of your financial health as well - especially your credit score. Upgrade’s Credit Health tool tracks your credit score, alerts you of any changes, and provides personalized recommendations for things you can do to maintain or improve your credit health. With your emergency fund and strong credit, you can prepare for anything that comes your way!


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