How to Build an Emergency Fund

Having an emergency fund is incredibly important and the roller coaster of this year has proven it to many of us. Currently my number one financial goal is saving up a 3 to 6 months emergency fund.

We can’t control everything in the world despite our internal desire for control and certainly. Life happens and it can be very unpredictable. The face that people can feel secure and then end up laid off the next week proved that the unexpected can happen. Beyond just job loss, cars will need repairs, medical costs can occur, and any number of unexpected things can happen.

Having an emergency fund helps you weather those unexpected storms so your financial life does not spiral out of control. When you are facing unexpected expenses you are able to tap into your emergency fund instead of taking on new debt.

Even if you are already in debt then an emergency fund can be the stepping stone you need to get out of debt because this system prevents you from adding more debt. Emergency funds are important because even if you are living near the end of your means you will have money set aside if things get even worse financially.

We are still paying off debt but we are prioritizing an emergency fund for just this reason – having money set aside for unexpected events means you won’t have to ever go into debt again.

So how do you build up an emergency fund?

Set Your Savings Goal

If you don’t know how much money you need for your emergency fund then it will be impossible to know when you can feel more secure with your savings.

Unfortunately the question of “How much should I have in my savings account?” will vary between all of us because an emergency fund needs to be tailored to your individual situation. There is no right answer to the question of “how much should I have in my emergency fund.”

In general there are a few milestones and goal amounts most of us can use as our individual goals.

For just beginning you can start with a goal of $1,000. This is often the experts recommendation for a minimum savings and often referred to as a started emergency fund. It is a great place to start when you have never saved before.

For a more secure emergency fund you should start thinking in terms of “months of expenses” and aim for between 3 to 6 months worth of your expenses.

Set Savings Milestones To Hit

For our situation we determined that one month of expenses roughly equalled $3,000 when we cut back all of our extra categories. That meant a 3 month emergency fund for us was $9,000 and a 6 month emergency fund was $18,000.

These types of numbers can be very daunting when you start saving your emergency fund. It’s easy to feel intimidated by those numbers so I recommend after saving $1,000 you then aim for 1 month of expenses saved first. This is actually the amount I recommend in a “beginner emergency fund” and it is the amount many budgeting systems recommend so you can get one month ahead of your spending.

After saving up one month of expenses you can then work on adding another and another until you have 3 months of emergency fund savings. Three months of expenses is a great amount to achieve and can make most of us feel much more comfortable.

Beyond that you can work on moving up to 6 months of expenses saved or even 1 year’s worth of expenses depending on your situation and risk tolerance. You can continue adding amounts to your emergency fund each paycheck until you are at your desired number. Remember that you should always base your numbers on your exact situation!

Along the way you can track your progress with a visual emergency fund tracker. Once you hit these milestones or mini milestones you set for saving you can give yourself a little bit of a reward!

If you are just starting out this can all feel daunting, but remember that consistent savings over time will put you in a much more secure position.

Pick Your Savings Account

You may wonder what type of savings account you should use for your emergency fund. Some people even ask if they should invest their emergency fund (short answer: no!).

I personally use and recommend an online savings account with a high interest rate. There are many online bank accounts you can open at placed like Capital One, Ally, or SoFi where you get a high interest on your savings with no fees.

Reasons I like these types of accounts for your emergency fund:

  • You don’t have account minimums so you can start your emergency fund from the very beginning with just $1 or $5 or whatever you can spare. If you watch my Transfer Tuesday videos then you know $5 of consistent action adds up!
  • They are easy to open and generally very user friendly. These banks are not complicated and they make the process very easy and also don’t charge fees that traditional banks may charge.
  • Online only banks make it more inconvenient to withdraw the whole amount in your emergency fund which means you will be more likely to only use it in a real emergency.
  • You can keep your savings account separate from your regular checking account. If you want you can open an account at one of these banks you don’t normally use so your money is safe and not immediately accessible to put into your checking account.

Online bank savings accounts are my personal favorite way to save but you can also save in any other savings account. Just make sure there is not a minimum balance requirement in case you need to use all the money and that there are no fees.

Most savings accounts, even the ones with the highest return will not give you much return for your money. That is totally ok because you are not looking to make this money “work for you” as an investment.

Your emergency fund is not meant to be an investment. It is meant to be an insurance policy so that it is there when you need it. You should not invest your emergency fund in the stock market since there is no guarantee the money will be there when you need it.

Add Money Every Paycheck

Once you’ve got your account setup it’s time to add money! Take a look at your budget and see what money you can set aside for emergency fund savings.

You can do this a number of ways. Many people like to automate their savings by either setting up an automatic withdrawal from their account or even having your paycheck deposit a certain percentage directly into that savings account. Both of these methods can help you consistently save without ever thinking about it.

You can also manually move the money every time you get paid. This method can work well for people as well if you enjoy feeling like you’ve done something and made progress.

So how much should you be saving every paycheck for your emergency fund? That number is totally up to you and what your budget can allow!

Remember that even if you can only save $5 or $25 that those amounts will add up over time. Your savings amounts can be small but when they are consistent they will add up. Taking action toward your goals consistently will matter more than the amount you choose to start and you can always increase it over time.

Add Extra Money

Besides the consistent paycheck savings you’ll contribute to your emergency fund you can also add any extra money you come across.

So where do you find extra money for emergency fund savings?

This would include things like bonuses, tax refunds, and any sort of windfall. You can contribute at least a big percentage of any big amount of money to growing your emergency fund.

It will also include weekly amounts you find within your budget from cutting back or spending less in certain areas. For example some weeks I’ve spent less than my grocery budget by $5 or $8. Instead of rolling that money over, I put it in my emergency fund. I started doing a thing called Transfer Tuesday where every week I moved money over on a Tuesday so I’d have certainty that at least some extra money was going toward my goals each week.

You can also put any extra money you earn from side hustles into your emergency fund. This “extra” money you earn beyond your normal salary.

In this step of savings you can also systematically increase the amount you were originally saving from your paycheck. You can increase your savings per paycheck from $25 to $30 for an example.

Remember that savings can feel like it’s taking forever but the more money you can throw toward your emergency fund the quicker it will go. Stay consistent and over time that money will definitely grow!

Keep Preparing For Emergencies

Like I mentioned earlier, unexpected things will happen. So we all need to expect the unexpected to eventually occur. All we can do is to continue preaparing for future emergencies.

One way of doing this is continuing to save until we have a fully funded six month emergency fund saved up. We never know when uncertain times will hit so saving during good times will provide during hard times.

Another way of doing this is building a stockpile of important supplies and preparing in physical ways for emergencies that may come along like a natural disaster.

We can also make a plan for how we will handle emergencies like losing a job. Knowing what to do when you lose your job can make the whole experience less emotional and more of a practical experience where you walk through certain action steps.

It is impossible to prepare and save for every potential emergency that may come along, but being financially prepared will help you work through emergencies and focus on what matters instead of worrying about your bank account and how you will buy groceries or make your payments.

If you haven’t already begun saving in your emergency fund, I highly recommend you do so!

Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.

Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.

Her favorite investment platform is M1 Finance, where she built a custom portfolio for free with no fees. She shares her portfolio growth and savings progress every month on YouTube.