How to Build an Emergency Fund: Complete Guide

If you ran into a financial emergency today, would you rely on a credit card or other high-interest debt? Would you take money from your savings account or dip into your retirement?

Financial emergencies tend to happen when we least expect them. If you’re not prepared, your one-time emergency could have a long-term impact on your savings, your total debt, or both.

You likely already understand that it’s important to have an emergency fund, and creating one may be on your to-do list. But you might not know how to get started. Take a closer look at how to build an emergency fund that you can depend on when you need it most.

How to build an emergency fund step-by-step

If you’re ready to finally build your emergency fund, follow these seven steps:

Step 1: Set your savings target

Ideally, an emergency fund should be able to cover between three and six months of living expenses. But for many people, saving that amount of money is very difficult.

Unfortunately, some people see that 3 to 6 month target, believe it’s unattainable, and then don’t even try to build an emergency fund. You don’t have to give up creating a fund if you can’t reach that target, though. Instead, set an achievable goal.

For example, you might set a goal of saving $500 by the end of the year. Once you reach that goal, you can aim to save another $500.

Step 2: Open a dedicated savings account

Many financial experts suggest opening a special savings account just for your emergency fund. If you keep your emergency fund in your regular savings account, it may be too easy to use it to cover daily expenses.

It’s important to choose the right type of savings account. Ideally, it should be easy to access in an emergency. If you choose a high-yield savings account, you might see your money earn a considerable amount of interest over time.

Step 3: Automate savings

If you want, you can set a schedule for transferring money over to your emergency fund. However, you can make it easier on yourself by setting up recurring automatic transfers. That way, you don’t have to worry about forgetting, and you’ll make a steady stream of deposits into your emergency fund.

It’s easy to get discouraged if you can’t contribute large amounts to your emergency fund right away. Even small contributions add up over time, and when it comes to long-term savings goals, consistency is more important. 

Step 4: Develop strategies to boost your savings

If you aren’t able to save as much as you’d hoped, it might be time to take a look at your overall money situation and identify a few areas where you could make some changes. One key strategy is creating a budget if you don’t have one already. 

There are plenty of budgeting strategies out there, but a good beginner one is the 50/30/20, which works like this:

• 50% of your income goes to needs
• 30% goes to wants
• 20% goes to savings and debt repayment

If you live in a high-cost-of-living area, have a low income, or both, you might not be able to direct as much of your funds to wants, savings, or debt payment. Some people find the 70/20/10 to be more realistic:

• 70% of your income goes to needs
• 20% goes to wants
• 10% goes to savings and debt repayment

Whichever budget you choose, you’ll probably identify a few areas where you can cut spending. Whenever possible, put the money you save into your emergency fund.

Saving a little bit each month might not seem too consequential, but it makes a difference over time. For example, imagine you’re making a budget and decide to cut a $10 per month streaming service you don’t use very much. If you put that extra $10 per month into your emergency fund, you save up an additional $120 over the course of a year.

Step 5: Set some ground rules

When you have an emergency fund, it’s a good idea to clearly define what constitutes an emergency. These are a few examples of situations when it would likely be wise to tap into your emergency fund:

• Suddenly losing your job
• An unexpected vet bill for your pet
• A surprise medical bill
• An urgent dental procedure
• An unexpected home repair

If you let yourself access the fund for the wrong reasons, you could use up money that you need for genuine emergencies.

Step 6: Regularly review

Even if you have automatic deposits already set up, it’s a good idea to periodically check in on your emergency fund. Each quarter, or at least a couple of times per year, you should see how much progress you’ve made and make any adjustments if needed.

For instance, if you get a new job where you’re earning another $500 per month, you might decide to increase your monthly automatic transfers by $100. If you have to take a pay cut, you might decide you need to reduce the amount of your contribution.

Step 7: Make replenishing a priority

If you do run into an emergency, you’ll likely be happy that you created your emergency fund. However, once you’ve dealt with the emergency, it’s important to create a plan to replenish it. Increase your contributions for a time, if you can.

What is an emergency fund?

An emergency fund is a special cash reserve set aside in case of major, unexpected expenses. If you need emergency surgery, have a surprise car repair, or otherwise encounter an urgent, unanticipated expense, you can use the funds in the account to cover it.

Why an emergency fund matters

Some people think that if they encounter a financial emergency, they can just use a credit card or dip into their existing savings account. In either of those cases, though, a sudden financial emergency can have long-lasting consequences.

Having an emergency fund helps you in these important ways:

• Offers you a financial cushion to help handle unexpected expenses
• Protects your retirement savings and other savings in case of an emergency
• Provides peace of mind and might reduce stress
• Stops you from having to go into debt over a surprise expense

Ultimately, an emergency fund gives you the flexibility you need to navigate surprises in life. A financial cushion grants you freedom as well as peace of mind.

Emergency fund vs. regular savings: What's the difference?

It might seem like an emergency fund is just a regular savings account with a different name. However, these two types of accounts have different purposes. Savings accounts are for planned future expenses, while emergency funds are for unexpected events.

An example would be if you want to put a large down payment on a new car in a few years. You would put money in your savings account ahead of time. But if your current car breaks down and suddenly needs an expensive repair, you would tap into your emergency fund to get the needed funds.

How much should you save in an emergency fund?

An emergency fund helps you prepare for the unexpected. But because you don’t know what you may need funds for in the future, it can be hard to know how much to put away. 

The 3-to-6-month rule explained

You might have heard people suggest that you save enough to cover expenses for three to six months. But how do you decide how much to save?

The exact amount depends on your situation in life and your risk tolerance. If you’re part of a dual-income household, both earners have stable jobs, and you have low debt and few dependents, you might only need a three-month emergency fund.

If you’re self-employed, part of a single-income household, or have dependents, saving up six months’ worth of expenses is generally better.

Some experts recommend going beyond six months of savings in certain circumstances. If your income is unstable or you’re someone in a highly specialized field, it may be best to have nine months’ worth of expenses saved up.

How to calculate your number

To figure out what number you should shoot for, start by writing down your necessary expenditures each month. Make sure you include the following:

• Your rent or mortgage payment
• Utilities
• Cost of basic groceries
• Insurance, such as health and car insurance
• Minimum payments toward debt

Once you’ve added up the value of your monthly expenses, multiply it by your target number of months. For example, if you’re a freelancer with necessary expenditures of $2,000 per month, you might decide you want to save six months’ worth of expenses. That would put your target emergency fund at $12,000.

What if you can't save that much right now?

For many people, saving up enough to reach their emergency fund goal might seem next to impossible. Even if they put whatever they can toward their emergency fund, it may take several years to get there.

If you find yourself in this category, don’t be discouraged. Instead, start off with an achievable goal. An emergency fund of $500 to $1,000 can still be helpful.

Where to keep your emergency fund

Once you have a goal in mind, you’re ready to start saving. But where should you put your money? You want your funds to be secure, but you also need them to be easily accessible in an emergency.

High-yield savings accounts

High-yield savings accounts have higher interest rates than most typical savings accounts. The higher the interest rate, the more your money will grow over time. 

Even though they usually pay more in interest than typical savings accounts, high-yield savings accounts are still very accessible. If you suffer a financial emergency, you should still be able to access your funds quickly.

Money market accounts

Money market accounts (MMAs) also offer higher interest rates than traditional savings accounts. You usually have to maintain a minimum account balance. Most money market accounts allow you to write checks or use a debit card to access your funds.

What to avoid

Before you open your emergency fund, you should be familiar with where not to keep your money, too. These are a few places you should generally not keep your emergency fund:

• Your Checking Account: It’s too easy to accidentally spend your savings
• Long-Term Certificates of Deposit (CDs): You may have to pay early withdrawal penalties
• Stocks/Equity Investments: Market volatility means you could lose your money

You should also avoid keeping your emergency fund anywhere that is not insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC will make sure you get your money back if your bank fails.

How to build an emergency fund on a tight budget

If you’re already on a strict budget, tightening it even more to put money in an emergency fund might sound daunting. It may take some time and some planning, but even those on a tight budget can eventually build an emergency fund. Here are a few tips that might help.

Start with $500

When a goal sounds attainable, you’ll likely be more motivated to try to reach it. That’s why it’s better for someone on a budget to focus on saving $500 first. Once you’ve saved a $500 emergency fund, you’ll have a sense of accomplishment. That often makes it easier to continue putting money toward the fund.

Micro-saving strategies

When you’re on a very tight budget, even saving little bits of money here and there makes a difference. These “micro-saving” strategies can add up over time:

• Use an app that rounds your purchases to the next dollar and saves the difference
• Set up automatic transfers to periodically move small amounts to your emergency fund
• Use cashback and rebate apps
• Give yourself regular “no-spend” challenges

You might also try setting a temporary bare-bones budget to see how much you can save. For instance, you might take a week and challenge yourself to avoid all non-essential spending. Calculate how much you saved and then add it to your emergency fund.

If you want to start using some of these micro-savings strategies, Grant Cash Advance can help. Grant makes it possible for people living paycheck-to-paycheck to access quick cash advances, but that’s not all we offer. 

When you join, you gain access to bill and spending tools to help you stay on budget. You can even earn cash by playing games or taking surveys in your spare time.

Using windfalls and extra income

If you get a surprise bonus or other extra burst of cash, put that money toward your emergency fund. If you have the time and flexibility to pursue extra income, that may help you bolster your emergency fund, too. A few strategies that might help include:

• Selling unwanted items
• Picking up a side hustle
• Putting your tax refund in your emergency fund

Remember that even saving $5 a week makes a difference. Be patient with yourself. Building an emergency fund on a tight budget can be very challenging, and many people don’t even try. 

Emergency fund by situation

Unfortunately, many situations can complicate your savings journey. There are several tips you can use to navigate these specific situations, though.

Building an emergency fund while paying off debt

The longer it takes to pay off debt, the more you end up paying in interest. But if you have an emergency, you don’t want to rely on credit cards and send yourself deeper into debt. So what do you do?

Many financial experts suggest taking a balanced approach: Save up a starter emergency fund of $500 to $1,000, and then start aggressively paying down debt. 

Building an emergency fund as a renter

Depending on your income and your rent, building an emergency fund can be hard. There’s nothing wrong with sticking to the usual recommendation of a $500 to $1,000 “starter” emergency fund. 

However, you might have a better sense of security if you save up one month of rent plus other essential expenses. Once you’ve saved up enough to cover one month, you can start working toward covering a second.

Building an emergency fund when you're living paycheck to paycheck

Living paycheck to paycheck can make it frustratingly difficult to save money. If you can immediately transfer part of your paycheck to your emergency fund, though, you might find that saving gets easier.

Even transferring $10 to $20 per paycheck to your emergency fund can be helpful. If you also take advantage of micro-savings strategies, you might even be able to save more than you anticipated.

An emergency fund is a first step toward financial freedom

Saving up for an emergency fund might not seem like a major accomplishment, especially if you can only save a few hundred dollars. Keep in mind that because you’re planning for the future and actually setting money aside, you’re already ahead. 

When you make saving a priority, even on a tight budget, you’ll be headed toward a greater sense of financial stability. Need a place to start? Earn points for cash by playing games in the Grant Cash Advance app.