During my local bank visits, tellers usually ask if I want to apply for a credit card. But one time stood out to me more than others.
I politely declined, as usual, and told her I was not interested in having their credit card. She asked what I would do if an emergency came up. Wouldn’t I need a credit card for it?
I was surprised, and my facial expression didn’t hide it at all.
I told her I had an emergency fund for situations like that. Since she seemed unfamiliar with the term, I explained that it’s money set aside for unexpected expenses.
What would you do if an emergency came up and you didn’t have the funds to cover it? Many people turn to credit cards, but there’s a better way: an emergency fund. It’s your financial safety net, ready to catch you when life throws you a curveball.
Here’s why it’s important and how to start building one today.
What is an Emergency Fund & What Should It Cover?
An emergency fund is money set aside in case something unexpected comes up. Unfortunately, it can’t be used for concert tickets. So you’re probably wondering, what counts to be used towards an emergency fund? Here is a list of unexpected costs, but yours could be different depending on your life:
- Car repairs
- Medical Emergencies
- Loss of income or job
- Home repairs
- Family emergencies
- Unexpected travel costs
- Major appliance failure or repair
If you have an expected cost coming up or want money for anything fun that pops up, consider opening a sinking fund account. A sinking fund is a savings account dedicated to a purpose, such as a concert or travel fund. That way, you have money, and it doesn’t tap into your emergency fund.
How Much Should You Save in Your Emergency Fund?
How much you need to put away in an emergency fund will depend on your circumstances, but it can be built up over time. You can start with a small goal of $1,000 and slowly build up to three months of expenses. Slowly work towards $5,000 and then $10,000. No calculations are involved, and it’s a good target to meet.
If you’re more of a planner like me or past the dollar amount goal, save towards three to six months of expenses. Three months of expenses is enough if you are a dual-income household, have a stable job, or have a great support system if anything happens. Six months is a good goal if you have an unstable income or a family to support with one income.
I started with a goal of $5,000 and have about three months of expenses now. I have three months because my husband and I work in a stable field, and one of our incomes is enough to cover the costs if one doesn’t work. However, my husband will leave the military in a few years, so I will slowly start building up to six months of expenses.
How to Calculate Your Emergency Fund
To determine how much you need for a three- to six-month emergency fund, start by calculating your essential monthly expenses. Focus on must-pay bills—things you can’t skip, pause, or cancel. Collect three months of bank and credit card statements to capture a complete picture, including any quarterly bills you might miss otherwise. While each person’s list may differ, here are common essentials to consider:
- Rent or Mortgage
- Utilities
- Groceries
- Cell Phone
- Internet
- Loan Payments
- Personal Care
- Pet Care
- Transportation
- Medical
Focusing only on your essential costs will ensure your fund is sufficient for unexpected circumstances. Then, multiply by 3-6 months to determine how much to save. If your essential expenses are $2,500 monthly, your three-month target is $7,500.
Here is the breakdown to calculate your three to six-month emergency fund goal:
- Step 1: Review your monthly expenses
- Step 2: Separate essential expenses from non-essential
- Step 3: Multiply your essential expenses by 3-6 months
Use a Planner To Help You Calculate!
In the Set & Don’t Stress Finance Planner, separate essential from non-essential by checking the box for fixed bills as you go through your expenses. Check out an example of the template below:
If you’re struggling to calculate your emergency fund or want an easy template to fill in, grab my finance planner to help guide you through the process in three simple steps:
- Step 1: Evaluate historical data like an accountant by reviewing your overall financial picture with templates to calculate your fixed expenses
- Step 2: Take action based on the data to create a plan using the emergency fund template
- Step 3: Tracks a year’s worth of data across a two-page spread
The back of the planner has eighteen unique templates for planning for almost any occasion. This three-step plan has helped me get ahead financially, and I hope it helps you too! Grab it on Amazon Prime or a printable copy today.
Where to Save an Emergency Fund?
The emergency fund should be put in an account that you can easily access but earn you some money. A high-yield savings account is the best option. You can check if your current bank has an option for a high-yield savings account to open one there to keep all your funds in one spot for easy management. If it doesn’t, a simple savings account will do, or you can shop around for a bank that offers reasonable savings rates. The rates change over time depending on a few economic factors, but you can see what a reasonable rate is right now.
An investment account is not a good place to put your emergency fund because the market fluctuates, making it risky. During COVID-19, many investments suddenly dropped but bounced back a year later. Losing your job during that dip would have been rough.
Once you have a solid emergency fund and your tax-beneficial investment accounts in order, you can consider opening a brokerage account for your investments. Unlike a retirement account, it’s accessible anytime, but your money is growing for you.
How Long Does It Take to Build an Emergency Fund?
How long it will take to save will depend on how much money is left over each month and your goal amount. Building an emergency fund will take some time, and you will definitely have setbacks. But that’s okay, that’s what it’s for. A setback in your emergency fund is better than racking up credit debt. I tap into my emergency fund as needed and build it back up when possible.
When I was 18 and still living with my parents, I didn’t have many expenses and worked full-time when I took a break from school. It took me about eight months to save $5,000, putting away half my paychecks. To save three months of expenses with all my responsibilities now, it takes more like a year or two to reach the goal. So, it’s good to set smaller goals you can achieve in less than a year and slowly work your way up over time.
As I write this, I see that there have been a lot of layoffs across several fields. If you are concerned you might be laid off, you can start prepping now. Review all your expenses and reduce unnecessary costs that don’t affect your quality of life. For example, I could cut back on my Starbucks trips and eating out to add more to my emergency savings account. I would be eating healthier because I’m cutting back on sugary drinks and making more meals at home, so it’s a win-win situation. The planning and preparation give me the peace of mind that I’m ready if anything pops up.
Final Thoughts: Prepare for the Unexpected
While I didn’t have the chance to explain everything to the bank teller, I’m glad I could dive into the importance of emergency funds here. Preparing for the unexpected gives you peace of mind and financial security when life throws you a curveball. Ready to protect yourself from financial uncertainty? Download my free sinking fund tracker to monitor your progress and save for your financial goals!
Quick Recap:
- Start with a small emergency fund goal of $1,000.
- Gradually build up to cover 3-6 months of essential expenses.
- Keep your emergency fund in a high-yield savings account.
- Only use your emergency fund for unexpected costs
- Regularly revisit your goals and increase savings over time.
