Budgeting Basics: Building an Emergency Fund

We’ve all been in that position before where something completely unexpected happens and we are not prepared financially (or mentally) for it. 

Unfortunately, that is often how life works, and there will always be unexpected expenses.

But wouldn’t it be nice to decrease the stress a bit by being financially prepared? That way you can just worry about the task at hand, not how you are going to afford it.

That is where an emergency fund comes in, and it is CRUCIAL in your budget.

If you are new to budgeting, and wondering what steps you need to take to get out of debt and save money, an emergency fund is the foundation of your journey.

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What is an Emergency Fund?

An emergency fund is a sum of money that you have reserved for, well, emergencies. It’s pretty much exactly as the name sounds. Yet so many of us never think to save for those unexpected expenses. 

The goal is that along your budgeting journey you will start to build sinking funds so that less things classify as an “emergency” (for tips on sinking funds, check out this blog post here).

But as you are learning about which inking funds to include in your budget, it is crucial that you focus on building up an emergency fund so that you have some money set aside just in case.

Pro tip: make sure that this money is LIQUID.

This means that the money should be put into a high yield savings account that you can access.

Do not put it in an investment account.

You want this money to be easily accessible if you were to need it in the moment. If it were tied up in investments, that could be tricky. Stay on the safe side, and keep it in the bank.

Why do you need an emergency fund?

Like I mentioned above, emergency funds are SO important at the beginning of your budgeting journey.

There’s no point in putting all of your money toward debt, if you’re just going to go right back as soon as an emergency or unexpected expense occurs.

It might seem like a waste at first to have money just sitting there, especially if you are racing toward a debt payoff goal.

Trust me, I know that feeling.

At the beginning of my budgeting journey, there were many times that I was tempted to withdraw the money I had in my emergency fund so that I could use it to pay off debt.

Try your best to avoid that temptation.

That money has a purpose and it is SO important. Not only do emergency funds provide you with a piece of mind, they are also a buffer.

2020 showed many of us that unexpected things can and will happen. Job loss, medical bills, family emergencies. These are things that we always hope won’t happen, but that we want to be prepared for just in case.

These emergencies can be stressful enough in and of themselves, your emergency fund can help eliminate some of that stress. 

Do your future self a favor and keep that money on hand.

How do you build an emergency fund?

Now that we’ve established what an emergency fund is, and why you should have one, let’s talk about how you can start to build up your emergency fund. 

Make a budget

The first basic step that you need in order to build an emergency fund is to actually start budgeting. If you’re already to this step, awesome! You can move on to the next step. But it would be a big miss on my part if I didn’t mention this. 

Budgets allow you to track your spending and dictate where you want your money to go.

You have no idea how much you can put toward your emergency fund if you don’t have a good picture of your finances.

So make a budget.

I highly recommend YNAB if you are looking for a place to start. It’s what I use to budget, and it helps lay out all of your money so you can start making it work for you.

If you want more information on budgeting, you can check out this blog post here.

Do a Savings Challenge

A fun way to build up an emergency fund is to do a savings challenge! There are TONS of savings challenges out there.

If you are a cash spender, you can do the $5 challenge where you save every $5 bill that you come across.

The Budget Mom has some awesome resources for savings challenges as well! 

Whatever you choose, savings challenges can be a fun way to keep you excited about saving and give you a visual tracker of your progress toward building your emergency fund.

Kickstart Your Emergency Fund

Like I mentioned above, emergency funds are crucial when starting your budgeting journey.

Therefore, the faster you can save up your emergency fund, the better. You don’t need to drop everything and give up your life until it is fully funded, but there are some pain free ways to make the process faster.

I highly recommend selling sh*t around the house that you don’t use anymore on EBay, Mercari and Poshmark.

My partner and I have been doing this for about 6 months and we have made over $1,500 just selling clothes and other random things that were just taking up space.

Decide that you will put all of this extra money into your emergency fund. You’ll be surprised how fast it grows!

You can also do this if your job gives you bonuses, or if you get extra tips one night. 

Work overtime? Put that extra money in your emergency fund. This is a great way to build it up without feeling deprived! 

How Much Do You Need in an Emergency Fund?

I wish I could sit here and tell you “THIS AMOUNT OF MONEY will make you feel secure and will cover any emergency you might have!” but that just isn’t the case.

I am weary of anyone who tries to say that someone should have a certain amount of money in their emergency fund. It’s truly SO personal.

But I can help you start to narrow down how much you might want in your emergency fund, and let you know my process for deciding how much to save for mine. 

Decide Your Risk Tolerance

How much risk are you willing to take with your budget? Are you someone who likes to plan for the worst case scenario? Does money keep you up at night? Do you have kids or people depending on you that cause you to be extra cautious with your money?

Or are you young and single with relatively few expenses? Do you just want to cover yourself for the whoopies in life? Do you have a fairly regular paycheck and a stable job?

Some of your answers to these questions can help you define your risk tolerance. 

AKA: how much are you willing to risk having to go back into debt to cover an emergency?

If you have a high risk tolerance, you might be able to shoot for a lower emergency fund total.

If you have a really low risk tolerance, you may prefer to save way more for your emergency fund to give yourself extra breathing room.

Again, it’s all personal.

Identify Your Expenses

If you are someone who owns a large house that requires more frequent repairs, or if you have a big family that you are supporting, your monthly expenses may be higher than someone who is just graduating highschool or college.

Many people want their emergency fund to either cover the cost of an emergency, or pay for their cost of living if an emergency prevents them from working.

Keeping that in mind, you will want to evaluate your expenses to see how much you would need to have on hand to cover a job loss or time off from work. 

It’s also important to decide if you would be willing to cut back to the bare bones in your budget during a crisis, or if you want to maintain relatively the same lifestyle.

Neither is right or wrong! It’s all about what works for you.

Some Jumping Off Points

Okay, I know I said that I don’t like when people tell others how much to have in their emergency funds, and I don’t! But I also appreciate having a jumping off point, or a point of reference.

Since I get that, I bet you probably want a point of reference too, right?

Fair.

So here are some ways that people tackle deciding on an amount of their emergency fund.

$1,000 Starting Fund

Personally, I don’t think that this is the end all be all to starting emergency funds. But some people like to start with a primary (lower) goal. This is the BARE minimum that you need to feel comfortable. Then they add more to it after tackling their debt.

I wouldn’t cling too much to the $1,000 amount. Like I said, it’s really personal. But if you want to start with a minimum with the understanding that you will continue to build on it after paying off debt, you can totally take that route!

3-6 Months of Expenses

Some people choose to decide what their monthly expenses are, then save enough in their emergency fund to pay for a certain number of months.

I’ve often seen anywhere between 3 to 12 months of expenses as a recommendation for an emergency fund. 

Again, this is personal. If you have a steady income and high risk tolerance, you may not need that much to feel secure. Conversely, if you are a freelancer with a highly variable income and higher expenses, you may want to save more. Or not! Totally up to you.

This is often what people refer to as a “fully funded emergency fund”.

And let me stress it takes a LONG time to fund that much money. 

If you are shooting for a higher emergency fund, be patient with yourself.

Rome wasn’t built in a day, so you won’t build your emergency fund in a day either.

My Emergency Fund

If you’re wondering about my emergency fund, I don’t blame you. I like to be nosey about other people’s money!

So first a little background and perspective.

I’m 24 and split expenses with my partner in a relatively low cost of living area. We don’t have kids. We both have full time jobs. I just graduated with my master’s and she is obtaining her master’s degree right now. I make $65k a year and my biggest expense by far is my student loans (about $68,000 of them). We each put half of our income into a joint account and use that for joint expenses and savings goals.

Okay, now that we have some background information on me, here is my emergency fund information.

I started out with $1,000 because I thought that was what everyone did. And honestly it sounds like a pretty number. I was lucky enough to get that money from graduation, so I just kept it in a separate savings account.

Now that I have learned more about budgeting, I wanted a little extra cushion there. I also decided more was necessary once COVID hit. It really put things into perspective.

So now my emergency fund isn’t just one sum of money sitting in a separate bank account. It’s a mixture of things.

I use YNAB to budget, so part of my emergency fund is that I am about 1.5-2 months ahead in my budget. So that means that the money I make in July actually goes towards September’s expenses and savings.

This gives me a cushion if something were to happen, I am fully funded for a while.

I also focused on really building up my sinking funds. I have about $4,000 in my sinking funds categories. These include things like Christmas, car maintenance, unexpected medical bills, a new car fund, annual memberships and a technology fund.

Here is a snapshot of my sinking funds category in YNAB:

So not everything in that fund counts as emergencies, but at any time I could use any of that money for an emergency if I needed it.

I built this up relatively quickly by living below my means, and selling things on Mercari and Poshmark.

For me, that’s what makes me feel secure.

So Now What?

Okay, now we know what emergency funds are, how to start them, and how much to put in them.

Sooooo what are you waiting for?

Start working on a plan for your emergency fund and get to it!

Your future self will thank you.