How to Build an Emergency Fund in 6 Easy Steps

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Did you know that, according to Yahoo!finance, less than 70% of Americans have less than $1,000 saved for emergencies?! Wow… if there was ever a wake up call that you need to have an emergency fund, 2020 has given us all the reasons.

Because of a global pandemic, businesses were ordered to close to the public, people were being laid off because there is no ability to work, Congress took too long to implement a relief package to American families… this is truly something we’ve never seen before.

I feel like I’m no stranger to economic upheavals. I started my banking career right as the Recession was hitting my state (great timing, yes?). I was even laid off for a week before (thank goodness!) being called back to work. I had moved to a new city and had only been there for nine months before that week-long layoff. I had no connections, no one was hiring because the economy was in a tailspin, and I was feeling desperate.

I joke now that it was only one week but it forever traumatized me. Having an emergency fund, which I didn’t have at the time, would’ve helped relieve some of my stress.

When I worked with businesses, my colleagues and I would refer to an emergency fund as “the war chest”. As most know, the recovery after the recession was slow, but 2017-2019 were stellar years! The businesses I worked with were making more money than they ever had in their existence, went from being small to medium-sized businesses, and were just happy to ride the economic highs. We were busier than ever like there was no stopping. We no longer had any seasonal slow-downs, we were always busy. Despite all that, my colleagues and I kept warning our clients to build their war chest. Why? We wanted them, even though times were really, really good, to have some caution and build a cash reserve in case there was ever an economic hiccup… cue COVID-19 and the 2020 year.

We need to be applying the same mentality in our own households. Even though we may not have employees relying on us for a paycheck (although maybe some of you are business owners), we may have loved ones who rely on us for financial security. It is important that we’re building our war chests- our emergency funds- for ourselves and our families.

(See this article about expecting the unexpected by Brandon at Rinkydoo Finance)

Even as a single woman, I knew that I was my only financial back up. I had no one else on whom I could rely if I lost my job. I had to make sure I could afford my mortgage and buy my food because there was no one else to take care of me.

Here are some tips to get your “war chest”, your emergency fund, started.

Know your actual expenses

How much would be a good amount to put in savings? For starters, look at your checking account and/or credit cards and see what your average spending is per month. If you’re already budgeting, you should know what our monthly expenses are.

Start small- a couple of weeks to a month’s worth of savings that could cover your expenses. I’ve heard the “save $1,000 for emergencies and use the rest of your money to pay down debt” plan, and you can do that. However, I don’t know about you, my emergencies are rarely only $1,000. For most, that doesn’t even cover rent, and I don’t know of any landlords that take credit cards. I would suggest a higher number than to start with.

If you don’t have a budget yet, you should at least be able to miss a couple of paychecks. That should be a bare minimum. If your net pay in a month is $3,000, start with $3,000.

Now that you know your goal, move on to the next step.

Open an account at a place that’s hard for you to get to

This step is key to making sure you don’t raid your emergency fund. If it’s money that can be easily transferred to your regular checking account, you’ll find that you’ll keep having “emergencies”!

There are financial institutions out there that have no physical branches, they’re online banks only. You can still access this money via electronic transactions. It takes three days to electronically move money from those accounts via ACH or writing a check to yourself, so the friction makes you less likely to pull that money out. Or, you could choose an institution that is not conveniently located for you.

One such bank is CIT Bank. I choose this one because they generally have higher interest rates than most because they’re an online only bank! If you’re going to park your money somewhere, at least try to get as much interest as possible from it! Here’s a link for you if you want to open an account at no cost to you.

If you want to shop around, I recommend using SuperMoney to find an account with a bank you probably don’t currently bank with and can give you a higher interest rate. SuperMoney allows you to comparison shop for an account with the best terms to fit your situation. If you’re going to have a large chunk of money sitting in an account long-term, may as well try to earn something on it! Check out this link to get a money market set up. You may even find one with a sign-up bonus, as well!

I personally keep my emergency savings in institutions that I don’t normally bank with, and I occasionally move it around if I can get a good sign-up bonus or really good interest rate. I can move the funds electronically from these accounts to my regular bank account and it’s never been issue for me.

Put your savings on autopilot

You know what amount you want to save up to, and you’ve set up your account in a place that’s safe from you (Ha ha!), now comes the execution.

I think the easiest way to get yourself to save money is to have it auto-drafted into that emergency savings account. If you get direct deposit, you can usually split up your paycheck to go to different accounts. Ask your payroll department if you don’t know how to do this.

Set aside an amount from each paycheck to go to that account. The best way to determine what this amount is should be determined by your budget. If you don’t have a budget set up yet, don’t let that hold you up from starting your savings.

A product my husband used before we were married to help him start a savings account was the Digit app. You can set it up to take a few cents (or more) here and there from your checking account and put it in a savings account. They do these little amounts based on your spending habits. You don’t really notice it, especially if you’re not on a budget yet, and you’ll have money saved in no time! This is truly auto-pilot. If you want to try it out, click this link!

If you’re feeling aggressive, can you spare $100 to put in your savings? If that seems too much, how about $25? How about $10? Those little things add up if you leave it alone, but do try to set aside a meaningful amount.

Expecting extra money?

If you know you’re going to be getting a tax refund, use that to boost your savings! (But see my post about why you shouldn’t want a tax refund.)

Got stuff to sell? List it on OfferUp (my favorite!) and add that money to your savings.

I’ve opened up bank accounts to take advantage of a promotional offer and used that to add to my emergency funds. Check out SuperMoney to see if there are any offers that you can take advantage of!

Get creative about looking for ways to build that emergency fund.

See this post to get extra money for your emergency savings by actually opening an account!

Keep adding to that account!

Don’t stop at one or two paychecks saved, keep going! If you do have debt that needs to be paid off, maybe only have one or two month’s worth of paychecks saved is fine for now, because paying off debt is also a high priority! Once that debt is gone, take what you were sending as payments and put it into that emergency fund instead!

If you use the Digit app, adjust your settings to take more and keep slowly building that fund up. Here’s the link again if you want to try it out!

You’ve heard the “3 months” or even “6 months” of expenses to be saved as a general rule. I personally feel that an adequate emergency fund should have at least 12 months worth of expenses, but maybe you feel 6 months is sufficient. Others may think that it should 2 years worth of expenses. My personal preference, and what I would make a goal, would be 12 months worth.

Conclusion

Most of the time, our emergencies are going to be cars breaking down or possible job loss. Considering all the once in a lifetime events that I’ve now experienced in my short years (9/11, Great Recession, COVID-19), we can’t think that emergencies aren’t going to happen to us. We need to heed the warnings while we can do something about it.

I hope this was helpful. Let me know in the comments of any tips that have worked for you!

RELATED

See this post for budgeting your savings.

See this post for the accounts you should have to execute your budget successfully.

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