How to Build an Emergency Fund Quickly

Learning how to build an emergency fund is the first step toward putting your finances in line. You’ll sleep better with some cash in the bank, and most importantly, you’ll be able to focus on longer-term (and more interesting) financial objectives.

This guide will teach you everything you need to know about an emergency fund, which is one of the most crucial aspects of personal finance. Learn about its relevance, appropriate saving levels, and effective techniques for accumulating money quickly.

Key Takeaways:

• An emergency fund is a financial safety net that is intended to cover unforeseen bills or times of no income.
• Starting with a $1,000 emergency fund might provide a basic safety net as you work on paying off high-interest debt.
• Your long-term goal should be to save three to six months of living expenses in your emergency fund.
• Keeping your emergency fund in a highly liquid, low-risk account, such as a savings account, guarantees that it is readily available when needed.
• You can continue to pursue other financial objectives, such as investing, as you build your emergency fund.

What is an Emergency Fund?

An emergency fund is a cash reserve set aside to cover unforeseen expenses or financial emergencies. You can use it to fix your car or house, pay medical fees, or get through a job loss. 

The fundamental advantage of having an emergency fund is that it allows you to address unforeseen expenses — which will undoubtedly occur — without causing considerable hardship or changing your present lifestyle.

On a basic level, having an emergency fund helps you to pay for a car repair to travel to work or to repair your furnace if it breaks down in the middle of the winter without incurring high-interest credit card debt that you’ll have to pay off for years.

Determining The Ideal Size of Your Emergency Fund

According to conventional thinking, a fully stocked emergency fund should contain enough to cover three to six months of bare minimum expenses (i.e., the items you can’t avoid).

To calculate the proper size of your emergency fund, first identify your bare minimum of spending. 

This includes:

• Housing. You must be able to afford your rent and mortgage payments with certainty.
• Utilities. Essential utilities like power, water, and heating should be factored into your estimates.
• Groceries. This contains the fundamental foods required to sustain your home.
• Other essentials. This includes any additional unavoidable expenses, such as medication, phone, internet, basic transportation, and minimal debt payments.

Add up these essential expenses to create a monthly bare-bones budget. 

This is the very minimum you require to get by each month without incurring further debt or neglecting your essential needs.

Once you’ve determined your bare-bones budget, multiply it by three for the lowest emergency fund size and six for the maximum. 

For example, if your critical monthly expenses are $4,000, your goal should be to accumulate an emergency fund of $12,000 to $24,000.

Monthly Bare Bones Budget	Three Months Emergency Fund	Six Month Emergency Fund
$1,000	$3,000	$6,000
$2,500	$7,500	$15,000
$5,000	$15,000	$30,000
$7,500	$22,500	$45,000
$10,000	$30,000	$60,000

When It Makes Sense To Keep A Smaller Emergency Fund

Having a significant emergency fund is generally beneficial. However, there are situations when having a smaller one makes sense. 

For example, if you’re paying off high-interest credit card debt, you might prioritize it over emergency savings. Otherwise, you would lose money by paying more interest than you earn.

A decent rule of thumb is to save aside $1,000 as a starter emergency fund before tackling your debt. The baby steps technique can help you get out of debt faster and establish a sound financial foundation.

The baby steps require you to pay off all non-mortgage debt, including school loans, before establishing a fully filled three to six-month emergency fund. See our article on the pros and cons of the baby steps for help considering whether this is the best technique for your scenario.

When It Makes Sense to Have a Larger Emergency Fund

On the other hand, some people may benefit from having a larger emergency fund than the typical three to six months of living expenditures. 

For example, if your income varies greatly owing to being self-employed, working on commission, or doing seasonal employment, you may require a larger cushion to handle the lean months. Similarly, if you work in a high-risk industry, have a large family, or suffer from a chronic health issue, you should save extra money for emergencies.

Another reason to have a larger emergency fund is if you’re a conservative who prioritizes peace of mind over returns. 

While having a large emergency fund has an opportunity cost (since you are not investing this money in something with a higher rate of return), it also protects you from doing things like selling stocks at a loss because you can’t sleep at night. A larger emergency fund might help you avoid making emotional judgments and stay on track with your long-term financial goals.

Best Places to Save Your Emergency Fund

Once you’ve calculated how much money you’ll need in an emergency fund, the next concern is where to keep it. 

The optimum location for your emergency fund should satisfy the following requirements: 

1. Safety. Your emergency fund should be kept in a location that protects your principal. You don’t want to lose money to market swings or fraud. The best approach to secure your money’s safety is to look for an account with FDIC federal deposit insurance coverage, which protects up to $250,000 per depositor per institution.
2. Liquidity. When withdrawing your emergency fund in an emergency, you don’t want to face any delays or charges. The easiest strategy to assure liquidity is to find an account that allows for unrestricted withdrawals with no fees or limits. You should also avoid accounts that require a minimum balance or have maturity dates that lock up your money for a set period.
3. Interest. Your emergency fund should earn interest while it is not in use. While the primary goal is not to maximize long-term gains, you should still receive a reasonable return on your investment to avoid losing value due to inflation. Look for an account that provides a competitive interest rate on your balance. You should also avoid accounts with monthly maintenance fees or other expenditures that could reduce your earnings.

With these goals in mind, the ideal place to keep an emergency fund is a high-interest savings account. 

While choices like money markets and certificates of deposit (CDs) may be appealing, they frequently have terms and conditions that make your assets less accessible, which is not ideal when dealing with an emergency. 

Withdrawing early from a CD may result in a penalty, and money market funds are not FDIC guaranteed. 

In a high-interest savings account, your money not only remains easily available, but it also grows over time thanks to the interest earned. And it is FDIC insured.

I prefer to have a separate account at a different bank from my checking account. That is not because I can get a better interest rate, but rather because I do not want to have easy access to my emergency fund.

In other words, while it is critical to keep your finances liquid, it is also critical to ensure that they are only utilized for legitimate situations. Keeping it with the same bank as my checking account would make it much easier to access the funds in non-emergency scenarios.

Numerous investment choices, including real estate investment trusts (REITs) and cryptocurrency interest-bearing accounts, promote themselves as alternatives to traditional savings accounts. While they may offer good returns, they are not actual savings accounts. They lack FDIC insurance and carry inherent risks such as principal loss and liquidity difficulties. Although these options can help to diversify an investment portfolio, they should not be used to replace an emergency fund, which is designed to provide safety, accessibility, and liquidity in the event of an unexpected financial need.

How to Start an Emergency Fund

Step 1: Calculate Your Emergency Fund Goal

The first step in creating your emergency fund is determining your goal. This entails assessing your financial situation and determining the amount of high-interest debt you have.

If you have large high-interest debt, set a $1,000 emergency fund goal. This first buffer might shield you from modest unforeseen expenses while you concentrate on quickly paying off your debt. 

If you don’t have high-interest debt, your emergency fund should be able to cover three to six months of basic costs. 

I recommend setting an aim of three months’ worth of expenses. After you’ve completed this, examine your financial circumstances and comfort level to determine whether you want to expand your emergency fund more.

Step 2: Determine Your Monthly Emergency Fund Savings Amount.

After you’ve determined your emergency fund target, you’ll need to select how much money to set aside each month for it. This money will be transferred automatically to your emergency fund.

For those starting with a $1,000 goal, this should be your primary focus and take precedence over other financial objectives. You’ll want to invest as much of your disposable income as possible in this objective, as it serves as a basic safety net in the event of a financial disaster.

After achieving $1,000, you may be faced with a decision: should you continue to prioritize your emergency fund until it is fully established, or should you begin pursuing other financial goals concurrently? 

This is a personal decision based on your financial situation and comfort level.

Some people value the peace of mind that comes with having a fully funded emergency fund more than the benefits of investing or paying off low-interest obligations. 

Others may opt for a more balanced strategy, creating an emergency fund while also contributing to retirement accounts, particularly if their company matches their contributions.

Personally, I support a data-driven approach. Run the math to see how various methods may affect your long-term growth.

For example, you can use a retirement calculator to evaluate how deferring saving by two years affects your goal retirement date. Alternatively, you can use this debt payoff calculator to determine how saving for an emergency fund affects the date when your debt is totally paid off.

While these calculations do not have to be the entire basis for your ultimate decision, they might provide useful information to help you make one. 

It’s also important to understand that creating an emergency fund takes time. 

The table below shows how long it will take to build a three-month emergency fund based on your savings rate, assuming you stick to a strict budget (defined as your total income minus your saves rate). 

Savings Rate	Time to Build a Three-Month Emergency Fund
10%	30 months
20%	10 months
30%	5 months
40%	3.8 months
50%	3 months

Step 3: Open a High-Interest Savings Account. 

Now that you’ve set your savings target and made a monthly payment, you must pick where to keep your emergency fund. 

For the reasons outlined above, the best option is to keep things simple and go for a high-interest savings account. 

You can use our comparison tool to determine the best high-yield savings account for your needs. 

Having this separate account also creates a psychological barrier, prohibiting you from making impulsive non-emergency purchases. While it may take a day or two to access these cash, this slight inconvenience helps to protect the integrity of your emergency fund.

If necessary, you can charge emergencies to a credit card and then pay off the balance by moving funds from your emergency fund savings account to your checking account. 

Additionally, this specific account makes it easier to track your progress toward your savings target. You’ll have a clear picture of where you stand in relation to the objective you established for yourself. 

Step 4: Automate Your Monthly Contribution

Setting up automated payments to your high-interest savings account ensures that your emergency fund is consistently replenished without requiring any manual effort from you.

This strategy, known as “paying yourself first,” views your savings goal as an unavoidable monthly payment. Rather than waiting until the end of the month to see what’s left over, your emergency fund donation is prioritized and handled immediately away.

This prevents you from falling into the typical temptation of spending first and saving later, which can postpone or derail your savings goals. By treating your savings contribution as any other monthly expenditure, you instill discipline and structure in your savings habit and gradually move closer to your financial security goal.

Most banks and credit unions provide automated transfer services, which are often as simple as setting up periodic transfers online. With this strategy, your emergency fund develops steadily and painlessly, freeing you to concentrate on your other financial duties and goals.

When It’s Okay to Use an Emergency Fund

An emergency fund is intended to ensure financial stability in the face of unexpected events that can have a significant impact on your finances. This isn’t a “I overspent this month” fund; it’s a safety net for major unexpected bills.

So, while we discussed unexpected medical expenditures, job losses, and auto repairs as possible applications for your emergency fund, it’s equally important to realize what an emergency fund isn’t for.

• Bills come in on a monthly basis. If you’re constantly raiding your emergency fund to cover monthly obligations, it’s time to rethink your budget or attempt a new budgeting strategy.
• Routine car and house upkeep. Regular maintenance such as oil changes, gutter cleaning, and HVAC tune-ups should be included in your budget.
• non-essential travel. If you decide to take a last-minute trip, it is not an emergency and should not be paid for using your emergency money.

However, there may be gray zones. 

Here’s an example: suppose your car requires an unexpected major maintenance, such as a timing belt replacement at 100,000 miles. While this theoretically should have been included in your budget, few of us adhere to our vehicle’s suggested maintenance plan.

In situations like this, including a “Stuff I Forgot to Budget For” area in your budget can be beneficial. Expected charges like these will emerge, so set aside money in your budget to cover these unexpected costs. 

At the same time, transportation is a need (not a luxury), thus one could argue that this timing belt replacement is a good use of an emergency fund.

Emergency Fund FAQs

Should you invest or set up an emergency fund?

There’s little doubt that you’ll profit from a small safety net (say $1,000) to cover unforeseen expenses. Once the money is established, should you invest or build it up?

First and first, this does not need to be an either/or question.

Specifically, there is no rule stating that you cannot do both at once. For example, you can contribute to your 401(k) up to the employer match and then use the remainder to construct an emergency fund.

Yes, it will take longer to establish a fully funded emergency reserve. However, you will also benefit from the “free money” that your 401(k) match provides.

Whether you should invest more aggressively or develop your emergency fund depends on which option is most beneficial to you. To make that decision, consider why you created an emergency fund in the first place. Also, calculate the opportunity cost for your options.

For example, imagine your goal is to capitalize on employment prospects, such as starting a new firm. In that situation, you might want to prioritize creating an emergency fund. If you wish to retire early, you might want to prioritize investment. 

Can you utilize your Roth IRA for an emergency fund?

Using a Roth IRA as an emergency fund may be a realistic strategy, but it is dependent on your specific financial condition and aspirations.

Here are two situations where it could be beneficial:

Starting out. If you’re just starting to save and invest, consider dividing your funds between a standard savings account and a Roth IRA. For example, you may save $500 per month in a savings account and another $500 per month in a Roth IRA, initially investing the Roth IRA contributions in cash or very low-risk assets. Once your emergency savings account is fully funded, you can change the Roth IRA’s investments for long-term growth.

Already established. If you’re further along in your financial path and have a sizable sum in your Roth IRA, you should consider utilizing it as a backup to a smaller, cash-based emergency fund. For example, you may retain around two months’ worth of living expenses in a cash emergency fund, knowing that you can use your Roth IRA contributions as a last resort if necessary.

Overall, a Roth IRA serves as a retirement savings vehicle. Using it as an emergency fund should not be the default option, but it is worth considering for people who are just getting started with their financial safety net, as well as those who have significant Roth IRA contributions and a clear awareness of their financial requirements and aspirations.

How do you build an emergency fund without any money?

Recognizing the significance of modest successes is essential for creating an emergency savings on a tight budget. It may seem trivial, but if you only have one dollar, save it. Saving everything you can — even if it’s only a dollar — is the first step toward developing the habit of saving.

Taking the deliberate step of allocating a portion of your income to a specific purpose — whether it’s an emergency fund or an investing account — helps you modify your perspective on money. So it’s fine if you have almost nothing to save right now. Begin at your current level and gradually advance.

The Bottom Line for Emergency Savings

If you don’t already have an emergency fund, now is the best moment to start. 

Even making your initial $10 contribution will help you to go to bed tonight feeling more financially secure than when you started the day. As that amount grows, you’ll have the peace of mind that comes from knowing that unexpected circumstances will not force you into financial ruin.

From there, keep building. Each step you take makes the following one easier. And I promise that saving money will no longer be something you dread.

And once you’ve met your savings target, things become exciting. Not only will you sleep better, but you’ll be on your way to doing greater and better things with your money, knowing you’re on stable ground.