How to create an Emergency Fund

Written By Jon Scott

In this article we’ll cover:

  • Why an emergency fund is important

  • How much should you save

  • Where the money be saved

More than half of American adults feel they do not have enough money saved, a third of American adults feel very uncomfortable with their savings, and 56% of Americans say they cannot cover an unexpected $1,000 expense with their savings. Bottom line, this is a huge problem. Emergency funds are specifically designed to stash money for emergency expenses so you can feel comfortable when unexpected expenses come along. This article will explain what an emergency fund is, how much should be saved, how to create a savings plan, and where to save the money.

What is an Emergency Fund?

An emergency fund is an indispensable financial tool–everyone should have one. Emergency funds cover sudden unavoidable expenses such as a car accident, home repair, or other unexpected expenses. Having money up front to cover unexpected expenses reduces the likelihood you will use loans or credit cards to cover unexpected expenses, because these forms of debt can lead to mountains of accumulated interest that will cost you more money years into the future.

How much should be saved?

The actual dollar amount you should save will depend on your lifestyle, necessary expenses, and any dependents, such as children or parents. For example, the emergency fund for someone who is 25 and single will look a lot different than the emergency fund for someone who is 45 and married with two kids. In general, for a single adult or dual-earning couple both without kids, the rule of thumb is to save 3-6 months worth of living expenses. For a couple where there is only one earner, you will want to save 6-9 months worth of expenses. For an individual or couple with children, you will want to save at least $2,000 per child.

These expenses should include the cost of shelter and utilities, communication (phone and internet), transportation, food, insurance payments (home, health, and auto insurance), and debt payments. Any expenses that can be cut, such as streaming services and eating out, do not need to be included.

How to start saving?

If you have not saved enough for 3-6 months worth of expenses, or haven’t saved at all, here’s how to get started.

  1. Set a percentage goal for how much of your income you want to save per pay period. A good rule of thumb is 20-30%.

  2. Calculate the dollar amount you need to save per pay period based on the percentage.

    • Convert this number to a consistent dollar value. If your pay varies widely from one paycheck to another, stick to the solid figure and either invest some or all the additional money in your emergency fund, or invest the additional amount in assets like bonds and stocks. You can also choose to spend the additional savings on personal gifts and vacations.

  3. Each time you get paid, withdraw the dollar amount you wish to save and place it into your emergency fund. Typically, you will deposit the savings amount in a high yield savings account; however, there are other options beyond just a high yield savings account, discussed below.

Plan B Emergency Fund

What if you don’t feel comfortable holding more than three months worth of expenses in cash? Where else can you put it? The simple answer is, it depends. You will want to have at least three months in cash, and the best place to put that cash will be a high yield savings account. But what about money beyond that three-month period?

The bottomline is: you need to have an emergency fund. Emergency funds are essential before investing in stocks, cryptocurrencies, or any other investment with risk. No one has a crystal ball and emergencies always come when least expected. However, you can lessen or even eliminate some if not all of the financial strain of unexpected expenses by maintaining an emergency fund.

Action Items

  1. Calculate your monthly expenses and figure out how much you will need to save based off number of income earners and family status

  2. Designate a dollar figure per paycheck/biweekly/monthly for allocating money to your emergency fund

  3. Open up a high yield savings plan if you have not already

  4. Deposit money into your high yield savings account or into bond investments as required.