You’ve probably heard that you SHOULD have an emergency fund, but do you ever wonder how to create an emergency fund? When your paycheck is barely covering all of your bills, it can be hard to fathom building a large emergency fund.
Feeling defeated before you’ve even started, you decide you’ll start that emergency fund later. You convince yourself that after that next raise, or next big windfall (e.g. a large income tax return), you’ll kick start that emergency fund.
It’s a good plan. The only problem is that by their very nature, emergencies pop up unexpectedly. If that happens to be BEFORE you get around to starting your fund, you’ll have to rely on loans or credit cards to see you through. Next thing you know, that future income you earmarked to start your emergency fund goes to paying off debt instead. And, it’s likely insufficient since on top of the debt, you now have interest to contend with too.
I’ve fallen into this trap and I want to make sure you avoid it. It’s easier than you think! Here are my simple strategies for creating an emergency fund.
Aim Low
The right emergency-fund amount depends on your household, expenses and financial situation. Instead of getting discouraged by a large final number, choose a first milestone that feels realistic for you.
Even a modest cushion can help with an unexpected expense. Once you reach that first milestone, you can keep building from there at a pace that works with your budget.
Once you’ve met your initial goal. Challenge yourself to increase your weekly or monthly savings so you can more than double your emergency fund in the next six months.
Choose the Right Savings Account
An emergency fund should be kept somewhere safe and accessible when you genuinely need it, but separate enough from your everyday spending that you're less tempted to use it for non-emergencies.
A dedicated savings account at a bank or credit union can work well. When comparing accounts, look at current fees, minimum-balance requirements, withdrawal access and interest rates directly from the financial institution, since those details can change.
The best choice is one that gives you reasonable access to your money in an emergency without making it part of your normal spending routine.
After you’ve built up enough to cover a month or two of expenses, open a money market account so your savings can start to go to work for you. The higher interest rates you’ll earn for higher balances, will motivate you to keep contributing. Plus, with a limit on the number of withdrawals per month, you won’t tap into it unnecessarily.
Finally, when you’ve managed to fully fund a six-month emergency fund, consider a high balance account. You’ll earn a ton more in interest and you’ll be less likely to pull out money unless it’s a TRUE emergency since it will mean you have to start paying a monthly maintenance fee. Even in the event of an emergency that pulls you beneath the minimum balance, the maintenance fee will probably still be well below any interest payments you would have had to make on a loan or credit card payment.
Set Up Automatic Savings
I STRONGLY recommend that you set up an automatic withdrawal from your paycheck or checking account directly to your savings account. It eliminates the need for you to make a decision to save each time. Instead, you’ll have to make an effort to delay or cancel the transfer if you think you need the money. Sometimes that minor barrier is all it takes to make you re-evaluate your spending so that you can meet your savings goals.
Even though our emergency fund is finally fully funded, I still have $100 per month automatically sent to a money market account. When a “minor” emergency pops up, I tap into that account instead of our high-yield emergency fund. I’m always surprised by how much money is sitting in that account when I have to pull money from it. Once you “set it and forget it,” the amount will grow faster than you realize.
It Works
This approach worked well for me because it made saving feel manageable instead of overwhelming. Your timeline and target may look different, but starting with a realistic first step can make it much easier to keep going.
This is so important and I wish we had had a fund in our early years of marriage! Luckily we have learned from our mistakes and have one now! Great tips.
I’m a big proponent of saving – because it always feels good to know you’ve taken every legit possibility into account before deciding how and where to spend your money! Great advice for those planning for the future.
Having an emergency fund is so important and this makes it so attainable! Even if you have low income, you can still set aside something each month! Great tips!
Great post and a great reminder why we should all have an emergency fund! I remember starting low and it did help.
Thank you for these tips! They’re so helpful. It didn’t occur to me before to set it up as automatic payments. I’m going to do that.
Such great advice. Even starting slow, means you will have something when the emergency pops up. And definitely make it hard to get at. It will make you think twice if it’s really an emergency or you just really want something.
Saving can really be overwhelming, so I think you’re smart to recommend a smaller number. Almost anyone can do $300… totally attainable!
I think $300 is a great starting point. When I think of the little “emergencies” that pop up – they’re usually $500 or less.
This is such a doable method! I think many of us put off creating an emergency fund because it seems like an intimidating and lengthy process. In reality, it’s not and can be such a huge help financially!
This is so important and something we need to teach our kids so it becomes part of their natural mindset. Sharing 🙂
I agree with you about setting up automatic deductions that way the money is “gone” before you even think about it. I have to confess, I’m not sure about aiming low.I usually follow the aim high philosophy. But I can agree with you if it establishes the savings habit that will contine. And saving any amount is better than none.