Emergency Fund Basics: Building an Emergency Fund


Do you have a financial safety net in case things go south? Have you considered what you would do if there was an unforeseen accident or illness that impacts your income?

Most financial advisors recommend an emergency fund for life’s “little jokes”.

An emergency fund is an important part of your financial picture. This article will help you decide how much you need to set aside and how to get started.

Emergency Fund Basics

Establishing an emergency savings fund now can have a big payoff later.

Setting aside emergency savings can help you get by if your home or car needs urgent repairs. The emergency fund also helps in more serious situations such as illness or unemployment

Ideally your emergency savings fund should be enough to cover your major expenses for six to nine months.

If that seems like it may be hard to do, you can always start by targeting three months of expenses and build from there.

What you'll need to save for:

  • Domicile expenses – Your emergency fund should include savings for housing expenses such as
    • rent or mortgage
    • property taxes
    • Insurance and utilities.

Protecting the value and quality of your home is super important, so it’s a good idea to also include savings for emergency home repairs.

  • Food – Estimate your monthly food expenses and include those costs in your emergency fund savings. Save money on food by reducing your food expenses
    • Cut back on dining out
    • Build your shopping list around sale items
    • Use coupons

Take any savings and apply them to your emergency fund.

  • Insurance – Consider and apply the monthly cost for medical and dental insurance. If you’re laid off, you may be eligible to stay on your former employer’s health plan for a period of time at your own expense through COBRA—the Consolidated Omnibus Budget Reconciliation Act. Also remember to factor in the cost of any disability or life insurance policies you may have.
  • Debts Plan for payments in your emergency fund for things like credit cards and other debt in order to protect your credit score. Additionally, try to take steps now to get out of debt to avoid the stress of dealing with these expenses if you become unemployed or face a financial challenge.
  • Transportation – If you have a vehicle, your emergency savings should cover necessary costs such as
    • Car loan
    • Auto insurance
    • Basic maintenance
    • Fuel and emergency repairs.
  • Personal expenses – Factor in costs related to
  • Household supplies
  • Haircuts
  • Clothes and toiletries

While they may seem generally inexpensive, they can add up. Remember to include those items when figuring out how much to save for an emergency fund.

Emergency Fund Savings Plan

Once you know what your emergency fund should cover, the next step is to set up a savings plan to build toward your goal.

One easy way to get started is to put any big payments that you get – such as a tax refund or holiday bonus, away as savings.

Aside from any big payments you get, work on a specific monthly savings goal and devote a percentage of every paycheck to savings.

It’s a good idea to pay yourself first by establishing automatic transfers into a designated emergency fund savings account. When you have automatic savings they can go a long way to ensuring strong and steady growth of your emergency fund.

You will want to consider the options for where to put your emergency fund such as

  • Regular savings – A regular savings account allows you to access your money whenever you want. A basic savings account is a good choice if you’re just starting to save your emergency fund
  • Money market accounts –Money market accounts are a good option if you want higher interest rates as your balance grows, at the same time maintaining easy access to your funds. These accounts tend to offer a better return than a regular savings account, but may require a higher minimum balance.

Whatever fund or account you choose just make sure it is liquid and you have easy and quick access to your money.

Emergency Fund Summary

Emergency funds are any important part of your financial plan, helping you to whether unexpected costs like home repairs or illnesses.

If possible consider saving six to nine months of expenses.

Remember to factor in expenses like insurance, food and debt repayment.

Choose a savings account that works for you. Remember, whatever savings account or method you choose, make sure you can access your emergency savings fund when you need it so you’re prepared for the unexpected.

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