How to Build an Emergency Fund

When first starting a savings journey, many personal finance experts suggest making $1,000 your initial goal. This can be considered a “rainy day” fund, and it is perfect for those inconvenient and often-unplanned expenses like new tires or a plumbing issue.

However, 2020 has shown us that when it rains, it pours. To prepare for a serious storm, you will need to build an emergency fund. The sole purpose of your emergency fund is to cover all of your necessary expenses if you suffer from a loss of income. The goal for your emergency fund should be to have enough money to cover three to six months of expenses.

Getting Started

To calculate your savings goal for your emergency fund, take a hard look at your bills and spending. Pull up your debit and credit card statements from the last three to six months and calculate the average amount you spent on necessities (rent/mortgage, food, utilities, transportation, insurance, etc.) each month.

Calculate what you spend on necessities each month, including minimum debt payments, and multiply that number by three, and then by six. That’s your target savings range for your emergency fund. For example, if your monthly total for necessities is $2,000, then the goal for your emergency fund is $6,000-$12,000.

Take that number and divide by the number of months in which you’d like to reach your emergency fund savings goal. If you can’t afford to save that amount, then you might need to give yourself a longer target date.

For example, $6,000/12 = $500 per month. If you are not able to put $500 per month toward your emergency fund, can you do $250, knowing that it will take 2 years to build your emergency fund to $6,000?

Remember, it’s better to start small and stay consistent than to take on more than you can handle when starting to save.

Following Through

 The easiest and most consistent way to save is by doing it automatically. Have part of your paycheck deposited into your emergency fund account every time you are paid, or schedule automatic transfers from your checking account to your emergency savings.

You can reach your savings goal more quickly by adding to it whenever you receive large sums of money such as bonuses from work, or your tax refund. The closer you are to achieving your target emergency fund amount, the more excited you’ll become to add to it.

Don’t feel bad if a large, unexpected expense comes up, or an emergency occurs and you have to dip into your emergency fund before you reach your target amount. That’s exactly what the money is there for—just make sure it’s a true emergency and no other accounts can cover it. After you’ve recovered from the unexpected expense, go back to adding to your emergency fund as usual.