You may intuitively know you need an emergency fund, but what’s the best way to scrape up the money to get one going? And where should you put the money once you’ve got it?
Follow our steps to building an emergency fund (even if you’re starting from $0!). Here’s how to get started.
The Basics of an Emergency Fund
Just in case you’re not sure what an emergency fund is, here’s a simple definition: It’s money set aside to fund life’s unexpected events.
You don’t know what’s going to happen to you in the future — or your belongings in the future, for that matter. You can’t predict when your refrigerator will die or your ancient Honda will gasp its last (hopefully not on the freeway).
An emergency fund offers you a great way to fund those emergencies, especially if you don’t have any other savings set aside for things that could happen in the future.
How Much Money Should You Have in Your Emergency Fund?
The first thing you should ask is whether you have debt you need to get rid of first. That tells you how much you need to raise for your emergency fund. If you have debt like credit card debt, stick to a $1,000 emergency fund.
After you build $1,000 into your emergency fund, then it’s a good idea to have three to six months of your living expenses in your emergency fund account.
Aim to put as much as possible into your emergency fund — the more you have stockpiled, the better off you’ll be (and the less you’ll sweat when a real emergency does crop up!).
Where Should You Funnel Your Money?
Your first thought might involve stuffing your money into a savings account. You can, because a savings account offers liquidity, which means that you can get to your money at any time.
However, don’t lose sight of these other types of accounts that you can use to put your money into as well:
- Money market account: A money market account is a savings account with some checking features. Money market accounts sometimes offer higher interest rates than regular savings accounts.
- High-yield savings account: High-yield savings accounts typically pay a higher interest rate than traditional savings accounts and almost always offer a better interest rate return than a checking account.
- Certificate of deposit (CD): A certificate of deposit (CD) is a savings account that holds a specific amount of money for a fixed period of time — six months, one year, five years or more. The issuing bank pays you interest. The downside to choosing this option is that your money is locked up for that specified amount of time.
How to Build an Emergency Fund
Building an emergency fund probably won’t happen with a snap of your fingers unless you have the money already ready to plop into it. You might need to do a little bit of intentional planning first! Here’s how to do it.
Step 1: Decide where you want to put your money.
Do you already have a money market account? A high-yield savings account? Got your eye on a CD at your bank?
If you already have one of these accounts, you may just want to move forward with whatever you’ve got. It’s easy to avoid thinking about making a decision about where to put your money. (Isn’t it easy to plunk your money into the same savings account you’ve used since 1992?) That might not be a great idea because even though you don’t want to risk your money because it’s your precious emergency fund money, you still may want to try to get the largest return you can.
Step 2: Figure out how much money you want to put into your emergency fund.
How much can you save per month to get started with $1,000? For example, let’s say you want to save $1,000 in three months. It’ll take $333 per month to get there. Will it mean that you cancel your cable subscription and watch Netflix instead? Can you get rid of expensive purchases?
If you can funnel more than that into your emergency fund, great. Again, if you have debt (like credit card debt), start with $1,000 and work on paying off your debt. Many financial experts say that paying credit card debt trumps everything after you save $1,000 in your emergency fund.
Step 3: Set aside money automatically.
You must make setting your emergency fund aside automatic. The beauty of setting money aside automatically is that you don’t miss the funds. Automating your savings can help you get to your goal more quickly as well. This way, you save your money before you have a chance to spend it. The money goes right into your savings account right after you get paid. You can do this in two easy steps:
- Sign up for direct deposit. Most direct deposit programs allow you to split your paycheck so a portion goes directly into your savings account.
- Schedule automatic transfers. Designate a specific amount of money to go into your account per month.
Step 4: Watch your accounts!
Don’t let your accounts accumulate money without checking them every once in a while.
How much do you have after one month? Three months? Are you meeting your goals? If so, can you start funneling money toward another account like a college fund for your kids, a 529 plan with UNest or a retirement fund?
Make sure your money is doing exactly what you want it to do — don’t lose sight of it!
Step 5: Use the money ONLY when you encounter an actual emergency.
You don’t want to use your emergency money for a non-emergency because you’ve earmarked that money for emergencies. Here are some examples of acceptable uses:
- Job loss: This is one of the most obvious emergencies. Unfortunately, you may not get a severance package if you lose your job. You might not find a new job right away, either. That’s why you want to be able to cushion your emergency fund with as much money as possible, in case you have to float your finances for a few months.
- Payroll gaps: Do you work for a nonprofit or startup that doesn’t offer a reliable source of income yet? You might need to cover a couple of weeks’ gap in pay with your emergency funds.
- Moving expenses: Your new employer or current employer may not pay your moving expenses, especially if you’re just moving across town. Tap into your emergency fund to pay for the UHaul or Two Guys and a Truck.
- Car “oopsies”: Contrary to popular belief, insurance doesn’t cover everything. Your emergency fund may help you cover the cost if you have to buy a new car or get stuck with repair bills from a fender bender.
- Medical emergencies: Even if you have medical insurance, a true emergency can prove financially devastating. If you get saddled with hospital bills due to major surgery or an accident, you want to have a cushion to help you through.
- Weather disasters: Do you have the right insurance coverage? Make sure you do, especially if you live in a hurricane-prone area. Pair insurance with your emergency fund so you can fund hotel stays, travel or other emergency expenses due to acts of nature.
- Taxes: You may owe a substantial amount of taxes on April 15. In that case, do you have enough money in savings to cover it? If not, you might want to rely on your emergency fund to see you through.
- Home repairs: Appliances don’t live forever, unfortunately, and they always seem to conk out at the most inopportune moments (air conditioner during the summer, heater in winter).
What constitutes a non-emergency? Great question! Don’t use your emergency money on:
- Clothes and shoes
- New cars (when your old car works just fine)
- Boats, RVs, motorcycles, four-wheelers or other toys
- Holiday gifts
- Keeping up with the Joneses
It’s really tempting to use your emergency money on things you think you need. A great way to figure out whether it’s truly a nonessential purchase is to delay the purchase for 72 hours. Ask yourself whether it’s a true emergency (truly an emergency!) and make a decision based on this list. If it doesn’t fit into any one of these categories, it probably isn’t an emergency.
Get an Emergency Fund Going Now
Saving $1,000 may seem like a monumental amount, but remember, just like saving for college with UNest, you can do it in small increments. In fact, it might surprise you just how far $25 can propel your savings forward.
The most important thing you can do is to do something about it. You really don’t want to catch yourself in a situation where you don’t know how you’re going to fund your roof caving in or a mishap with your car.
Make a dedicated effort toward your emergency fund and your future self will thank you!
Melissa Brock is a 12-year veteran of college admission, founder of College Money Tips and Money editor at Benzinga. She loves helping families navigate their finances and the college search process. Check out her free essential timeline and checklist for the college search!