Simple Steps to Creating the All-Important Emergency Fund

Key takeaways:

• An emergency fund can mean the difference between making it through a rough patch and experiencing a serious financial crisis.
• Create and build your emergency with small, gradual steps.
• Looking for creative ways to supplement the fund will help you be ready for the inevitable unexpected expense.

You know that having an emergency fund in place is important. You understand that some unplanned expense always comes up. And you know that depending on a credit card (or worse, a payday loan) when these unexpected expenses arise is not a good idea.

But with the cost of living, inflation and a myriad of bills to pay each month, how can you do it? The answer is in taking small steps over time. 

How to save for an emergency fund

First and foremost, make your mortgage or rent payments. You never want to risk your home. Next, work on paying down credit card debt you carry. At today’s interest rates, doing so provides a higher return than almost any investment you can make. And having no credit card debt provides a financial cushion in itself.

Then try taking these steps, one at a time, to gradually build your emergency fund. Remember that Rome wasn’t built in a day, and neither will your emergency fund. 

1. Make the emergency fund part of the budget – which means you need to have a budget. Creating one need not be complicated. Try an app, software, paper and pen, or a spreadsheet.
2. Be consistent. Many experts recommend saving 10% of all income – that’s 10% of every single payment – you receive. If you can do more, that’s even better. If you need to do less, do so. Choose a percent you can stick to and dedicate that money to the emergency fund. Another option is to set a monthly dollar amount to put into the emergency fund. Most banks and credit unions let you set up automated transfers from checking accounts to savings account. If you need to, start with a small amount, even if it’s $10 a week. (Do that and you’ll have more than $500 in a year). Increase it whenever possible. 
3. Get creative with generating extra income. Many people find they can make anywhere from a few hundred to a few thousand dollars decluttering their homes and selling unneeded items online. Others may find additional opportunities online, ranging from tutoring to customer service. Babysitting, pet care and yard work are services that are always in demand, and offer flexible hours. Or take advantage of current jobs in retail or food service that pay high hourly rates for part-time workers. Commit to devoting any additional income to the emergency fund.
4. Contribute to retirement savings once you have a solid emergency fund in place. However, if you work for a company offering a matching program, do what you can to contribute as much as you can, even while working to paying down credit card debt. Why? Not participating is like giving money away. 

How much to save

The answer depends on you, your family and your situation. Today, many experts suggest accumulating an emergency fund that would cover at least six to nine months of basic living expenses. More – like 12 months – would be better. The pandemic proved that it’s possible to lose your source of income, and that it can take quite a bit of time to get back on your feet financially. We also know that medical expenses can quickly cause financial disaster. Any one thing that goes wrong can spiral and set someone back for a long time.

While an amount covering several months’ worth of basic expenses may seem intimidating, keep in mind that this is not the same amount as your salary. The emergency fund is intended only to cover absolutely essential expenses – not vacations, dining out or other luxuries.

A good starting goal is to aim for the amount that would send you reaching for your credit card. A doctor’s bill for $500? An appliance repair bill of $200? Start there and build. 

Expecting the unexpected is a given. Having some savings to rely on can mean the difference between making it through a rough patch and experiencing a serious financial crisis. In short, having an emergency fund really does pay off.