Emergency Fund: How To Start And How Much You Need

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Don’t let an emergency catch you off guard. Find out how building an emergency fund can give you peace of mind during a difficult time. It’s time to take control of your financial future starting today.

What if, no matter what life throws at you, you wouldn’t have to worry about having enough money to cover it?

Life can be crazy and unpredictable in ways we cannot even imagine (although, in the last few years, we have had a bit of a bitter taste of how quickly things can change).

But having a big enough cash cushion to fall onto will take away at least the financial stress that comes with uncertain situations and unforeseen expenses.

I hate to be all doom and gloom, but in a matter of days, we could find out about an expensive emergency repair, lose our jobs or – let’s hope this never happens – get sick with a sudden illness.

Can you imagine adding the stress of not having enough money to pay the bills to some of these unthinkable situations?  

Honestly, the percentage of Americans with less than $1,000 in savings is shocking! According to new data from GoBankingRates, 69% of Americans have less than $1,000 saved in cash…and a staggering 45% have $0 in savings.

Do. Not. Be. One. Of. Them.

This is why building an emergency fund should be your priority, on top of everything else you are thinking of doing with your money right now.

And let’s be clear. Building an emergency fund needs to come before:

  • Putting money in your pension
  • Thinking of investing
  • And even before paying down some of your debt

What is an emergency fund?

An emergency fund is your insurance policy against the unexpected. It’s your rainy day fund, a stash of cash that you keep in a safe place (i.e., not under your bed – more on that later), ready to be used when something out of your control happens.

Things like:

  • Your car breaking and needing an emergency repair.
  • An unexpected medical emergency.
  • Losing your job.
  • And why not, even the next zombie apocalypse.

An emergency fund is there to protect you WHEN an emergency happens, not IF it happens. Because no matter how prepared you are, unexpected things and unplanned expenses will happen in your life.

Emergency fund definition

An emergency fund is a readily available source of assets to help one navigate financial dilemmas such as the loss of a job, a debilitating illness, or a major repair to your home or car (Investopedia).

Why do you need an emergency fund?

No matter how prepared you are, emergencies happen to everyone…

An emergency fund will prevent you from going into debt when things in your life are tough or when you face an unexpected expense.

You might think it’s crazy to set aside so much money, especially if you are on a low income or are already struggling. But it’s exactly when you don’t have much cash coming in that things can get difficult very quickly and unexpectedly.

How much money should you have in your emergency fund?

Ok, this is when things can get a bit wild. 

There are different schools of thought about the right amount of money you should have in your emergency fund.

My advice is to start small with an achievable initial goal and build up your emergency fund from there.

1. Beginner 

You are a beginner if, whether you earn $10,000 or $100,000 a year, you struggle to get to the end of the month. You have to do everything in your power to save at least 3 months of your essential expenses (I will tell you how later).

Let me be clear: 3 months of expenses is just the starting point, and it ain’t going to save you if the zombies are coming, but it will help you to cover your basic needs in case of a small emergency or sudden expense (like your car breaking down, or some minor unexpected medical bills).

2.  Craftsman

You are getting the hang of your savings at this level and want to step up your game. Having 6 months’ worth of savings to cover your essential expenses will put you in a much better position.

Even temporarily losing your job shouldn’t give you too many sleepless nights: you will have plenty of time to figure things out without having to worry about paying your mortgage or rent and your bills.

This is a good level for most people who have stable jobs and are not the sole or primary breadwinners in the house.

3. Master

A whole year of essential expenses: this is the gold level. I admit it’s not easy to accumulate 12 months of essential expenses. And if you love investing, it might feel like an unnecessary sum of cash sitting in a bank account, losing value to inflation.

But having such a big cash cushion can get you out of most emergencies life will throw at you. 

I would aim at this level if you want extra security, you are a single-income family, or have an unstable job. But before you start to think about reaching this level, you should have all your debt paid off (except for your mortgage). 

4. Extreme

Go for 36 months of essential expenses set aside!

In our journey to financial freedom, I kept going back and forth about how much money we should put aside as an emergency fund. Considering we plan to take some time off work entirely and live out of our passive income investments, we had to be more conservative than most. 

We decided to keep 3 years worth of living expenses in our savings account.

Yes, it’s a lot. Yes, we could generate a lot more by investing it in an index fund or buying more rental properties.

But you know what?

Nothing makes me sleep better at night than knowing that we could beat most recessions by simply using our cash emergency fund, no matter what’s going on in the world.

Infographic of how much you need for an emergency fund

How to build an emergency fund fast

Ok, you might need to go and make a cup of strong coffee, tea, or even pour a little glass of wine before you start working on building your emergency fund…because it’s going to take a while.

1. Calculate your essential expenses per month

Download your bank statements for your last 60 days and figure out exactly how much you spend on your essential expenses. Forget about cable, Netflix, your morning lattes, or eating out.

Here we are talking about bare-bones survival.

Spending time looking at the last 2 months of your essential living expenses will give you a good insight into what you will need to survive in an emergency (like losing your job).

You need to include things like:

  • House expenses (monthly rent or mortgage, property taxes, home insurance, essential utilities)
  • Transportation (car payment, insurance, gas, public transport)
  • Groceries
  • Health insurance, prescriptions, life insurance
  • Essential debt repayment (any high-interest debt repayments that you need to keep paying) 

To make things easier, you can download my emergency fund calculator. It will help you to figure out quickly how much you should set aside.

Emergency fund calculator

Unexpected events can have a big financial impact on your life. An emergency fund is a stash of money set aside to cover them without stress.

2. Look at your discretionary spending

Now that you have an idea of what you are spending on essentials let’s go back to those pretty bank statements and let’s look at how much you spend on average on everything else.

These are monthly expenses like restaurants, work lunches, that lovely new pair of shoes you buy every month, going out drinking with friends…pretty much everything you could cut out if you really had to.

Looking at what you actually spent on extras in the last couple of months is an easy way to give your financial situation a reality check.

You’ll be surprised at how much money we spend on stuff we don’t need.

3. Cut back on discretionary spending

Now that you know how much you are spending on non-essential stuff, you can start thinking about what you can easily cut out from your everyday life.

Maybe you could meal prep your lunch and bring it to the office 2-3 times a week but still eat out on a Friday? Or cancel your gym membership if you don’t go very often and just pay for classes?

The key here is consistency and not going too far. If you deprive yourself of everything you love, you won’t last long.

And remember: even looking at essential expenses can get you big savings. You could save money on cheaper home or car insurance. Or try to get a raise and save all the difference. 

You could even look at creative ways to earn a bit of extra money on the side to beef up your emergency fund. Things like taking part in focus groups for extra cash, selling clothes you don’t wear anymore, or renting your spare bedroom on Airbnb, can help you easily set aside hundreds of dollars a month with a little extra effort.

You can find more ideas on things you can easily save in this post.

4. Save the difference

Once you have figured out how much you can set aside every month, just move the money into your emergency savings account as soon as your salary hits the bank. You can even set up a direct deposit every paycheck.

Starting a budget is also a good idea to help you to stay on top of your savings goals.

Don’t get discouraged by how long it will take you to get there. And no matter how much you earn, you have no excuses: we can all learn to save a bit of money every month, even if it’s a small amount.

Even if you can only save $15 a week, you will have $780 in your emergency fund at the end of the year. That’s a big difference from having $0.

You can get there one little step at a time!

Benefits of having an emergency fund

1. It keeps your stress levels down

When you don’t have money set aside, every event that has a financial impact can turn into a drama.

Think about this:

You have one car, and you need it to drive to work. The transmission breaks, and you need to pay $780 today. Your check won’t come in for another 2 weeks.

What can you do? If you don’t have an emergency fund, you are going to struggle. And it’s not just about the money you need for the repair: you might lose hours at work and might end up missing an important meeting. Or you might have to get a taxi to the office on time, creating even more debt.

Not only are you stressed out because of the situation. You will be doubling up on the stress because you don’t know how to pay for it.

You might have to put the bill on your credit card. Or even worse, you may have to use a payday loan with incredibly high-interest rates (we are talking hundreds of dollars). Plus, you will need to repay it by your next payday. Which means you still need to find enough money.

But with an emergency fund?

You are just annoyed by the inconvenience of having to bring the car in to repair.

There is a big difference!

2. It gives you financial stability

Having an emergency fund puts you in a position of strength because you can access cash in minutes. 

And this helpful in so many ways:

  • You won’t have to take on costly loans or use credit cards to pay for unexpected financial emergencies.
  • No need to sell your investments during a bear market.
  • You won’t have to access your 401k if you lose your job.

3. It gives you peace of mind

I know money isn’t everything in life, but somehow, life gets a bit easier when you have some.

A friend of mine was about to lose her job a while ago because the company she worked for was restructuring the team. She was so stressed out. Both she and her husband were working full time and had high-paying jobs, but she confessed that if she lost her job, they wouldn’t have been able to pay the mortgage after only a couple of months!

First of all, you should never put yourself in a situation where your housing expenses are so high that you couldn’t survive financially if one of you lost your job. Second, with a big enough emergency savings fund, my friend would have had a safety net and worried a lot less about losing her job.

 You can see how having enough to cover your basic living expenses for 6 to 12 months can be a complete game-changer.

Where should you keep your emergency fund?

You need to remember that an emergency fund is not an investment. 

It needs to be:

  • Easily accessible
  • Liquid 
  • Stable
  • And above all, safe

It’s not about getting the best return on your money. It needs to be liquid. Otherwise, it wouldn’t be an emergency fund.

But it’s also essential that it’s not too easy to access, or you might end up spending part of it for, shall we say, silly reasons.

The best place to keep your emergency fund is in a high-interest savings account, where your money will stay safe and won’t be prone to swings in value but will still earn you a higher-than-average interest rate.

Also, make sure you can easily access your savings account at any time without penalties. Don’t be tempted to lock it away for 2-3 years to get more interest.

Chasing a 0.5% extra in interest isn’t the point of your emergency fund!

The cost of having an emergency fund

Yes, having an emergency fund comes at a cost: every dollar you have sitting in a savings account isn’t invested. And if you have a big enough cash account, you could be losing big time.

And you are losing twice:

1. Opportunity cost: the average return if you invest your money in the market is currently around 8% annually. Even at a conservative 6%, you will lose out a lot over the long run.

Let’s compare the difference between having $100,000 sitting in a savings account at 2% for 10 years or investing it in the stock market at a very conservative 6% (remember, the actual average over the last 100 years is closer to 10%).

Money sitting in an emergency fund (savings account at 2% interest)

Money invested in Index Funds (6% return)

That’s a staggering $57,185.33 difference over only 10 years. Imagine how much you will lose out over 20-30 years (or don’t or you could start crying).

2. You are actually losing money: Regular savings accounts these days can earn you between 2% to 4.5% interest, which doesn’t even cover inflation. This is why financially savvy people always invest their money. If you don’t invest, you lose buying power. And the longer you keep your cash in a bank account, the bigger your loss.

So why am I even telling you to build an emergency fund and keep it in cash?

Because your emergency fund is your insurance! And you need insurance to go through life with ease.

No investment will give you the financial security of being able to access cash during unexpected emergencies.

When should you use your emergency fund?

An emergency fund is for true emergencies! It’s not something you should use to buy a cashmere jumper on sale or to go on vacation. 

These are things you can use your emergency fund for:

  • Car repairs
  • Technology breakdown
  • Emergency medical costs
  • Emergency dentist bills
  • Vet bills or other unexpected costs for your pets
  • Emergency home repairs
  • Boiler repair or replacement
  • Unscheduled events and weddings
  • Tax bills
  • Legal bills
  • Job loss and unemployment

Suppose you want to set aside money for other things once you reach your emergency fund goal, fine. You can start separate savings accounts for things like vacations, clothing, and stuff you want to splurge on.

What’s next?

Ready to start building your emergency fund? Download this helpful emergency fund calculator to find out how much you need to set aside.

With an emergency fund, you can focus on solving your problems when things go bad without stressing too much about your finances because your back is covered against unplanned financial emergencies.

Having a good emergency fund is the first step toward financial freedom.

It will enable you to worry less about money and have more time to do the things you love!

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  1. Great information and tips! Thanks for sharing

  2. Mathabang Molise says:

    The article was soo informative. I learned alot from it

    1. Sara @ Gathering Dreams says:

      I’m glad you like it.

  3. Sheila Guions says:

    Most informative article I have read on the subject of emergency funds and how to begin.

  4. Dennetta (Dee) says:

    Thank you! for this information. This will help my family and I out tremendously, believe it or not living pay check to pay check is all my husband and I have known how to do, and to be perfectly honest I can NOT do this any more. I want to be able to have that nest egg for just that an emergency or any unexpected. This will help me focus and teach my spouse that it is ok to live on a budget and not try to be like everyone else, as well as be the best example for our young adult children.

    1. Sara @ Gathering Dreams says:

      I’m glad this article helped you and your family.

  5. Tiffany O'Neill says:

    I have questions. I’m using your calculator to figure out the beginner emergency fund. And just using those calculations for the next steps. Should I continue to do it that way? Or just recalculate once some of the credit cards and other debts are paid off?

    1. Hey Tiffany,
      It’s up to you and what you feel comfortable with! You can keep using the same calculations, and slowly increase your emergency fund.
      The important thing is to have something set aside, and not worry too much about the rest. When I was just starting out, I liked recalculating my emergency fund every 6 months or so, just to make sure my needs were still the same.

  6. Hey, how to download your EF template?

      1. Hey Sara,

        Thanks so much for your response. I tried to unsubscribe but can’t find my way to re-subscribe again and download this EF template of yours :'(

      2. Unfortunately, I can’t manage to download it. :'(

  7. Hello!
    I downloaded your emergency fund calculator but it doesn’t compute what my savings should be for a year. Any tips?

    Thank you!
    (Loving your blog btw)


    1. Hey Mona,
      Thank you so much 🙂

      Have you selected the Level of Emergency fund you want to build? You need to click on one of the options for the amount to appear.
      Also, it only works if you open it as a Google sheet. Did you download it as an excel file?

      Let me know if you still have trouble!

  8. Hi, thanks for sharing this article.
    Having an emergency fund is vital for any person. And everybody should take it into consideration.