A Quick Guide to Building an Emergency Fund
We’ve all experienced a financial emergency — an unforeseen loss of income, a surprise medical bill, or a furnace on the fritz in the middle of the winter. But the reality is that much of what we claim to be unexpected is practically inevitable. This is why you need an emergency fund.
What is an emergency fund?
An emergency fund is a safety net to catch you or cushion the blow when a financial emergency arises.
It’s for true emergencies, not things you urgently want. If you lose your job tomorrow, can you cover the mortgage until you find a new one? If your car breaks down, can you afford to replace the transmission this week? This is when an emergency fund comes in handy.
How much cash do I need for an emergency fund?
A good rule of thumb is to have a minimum of $1,000 on hand. Then, separate emergency costs into two buckets: expenses and job loss. Expenses: list everything you suspect may go wrong in the next three years; auto repair, new roof, HVAC, medical bill. Job loss: take your net paycheck and multiply it by the number of pays you estimate it will take you to find a new job. The greater of the two buckets is your required emergency fund amount.
How do I build an emergency fund?
The first step is to set aside $1,000 immediately. If you have investments, this might be as simple as liquidating assets. If you don’t have the money, sell something or do side work to come up with it quickly.
After having the first $1,000, aim to build your fund fast.
- Know your household expenses, cut unnecessary costs, and set a realistic budget.
- Identify a specific amount to save each month and treat it like a bill, no different from a mortgage or rent.
- If you come into extra money, add it to your fund until you hit your target.
Where should I stash my emergency fund?
Your emergency fund needs to be easily accessible—in case of emergency. It should always be liquid—cash that you can withdraw at a moment’s notice, such as in a checking or interest-bearing account with a debit card or checks.