How to Build your Emergency Fund

A few years ago, our van needed four new tires to pass inspection. In the same week, I woke up one morning to an icy cold shower and the discovery that our hot water heater was broken beyond repair.

The total cost of the replacements was $1000–I’m done. I’m going back to bed!

Have you had weeks like that? Where everything seems to go wrong at once and the cost is way more than you expected.

How would you pay for those expenses? Do you have enough cash to cover them or would you have to rely on high-interest credit cards or a loan from your family?

According to a 2019 Go Banking Rates survey, 69% of Americans have less than $1000 in a savings account. With little money in their bank accounts, these Americans couldn’t afford these unfortunate expenses without using a credit card or maybe relying on a loan from family and friends.

We could have easily grabbed our credit card during that miserable week, but thankfully, my husband and I had the cash. We learned a valuable lesson many years prior about the importance of an emergency fund.

A Very Tough Year

We have lived through some challenging months as small business owners, but 2007 was a very tough year for us. We had a toddler and a baby on the way and our business was struggling. Every month, our business income must cover the business AND household expenses, but many months during that year, our income barely covered the business expenses, leaving very little for our household.

I remember one morning my husband and I were sitting at the kitchen table contemplating if we should sell one of our cars. It was a very scary time for us.

What helped us through that time was the money we had saved in our emergency account. If not for that fund, we would most likely have used credit cards to survive. We reduced our spending where we could that year, but the money to pay any shortfall each month came from our emergency fund.

That emergency fund saved our business, our sanity, and our marriage.

By the end of 2007, our business picked up again–thankfully–but not before we practically wiped out our savings. We had enough to get us through one more month.

What is an Emergency Fund?

An emergency fund is a safety net. When an emergency happens, you use the cash in the fund, instead of your credit card.

An emergency fund is NOT a spending account. Instead, it is for life’s emergencies and unexpected expenses.

Please don’t confuse this money with vacation money or new furniture money. Your wants and dreams are secondary and should be saved separately.

Unemployment and reduced income are considered emergencies, and so is a leaking roof, a broken hot water heater, or a dead car battery. However, a broken TV, cute riding boots, or the snazziest new gadget…not so much.

Where Should the Money Go?

Create a separate savings account and call it your Emergency Fund. Be diligent about how you use this account. It might be best to use an account that isn’t linked to an ATM card, thus making it somewhat annoying to reach the funds, but not difficult when you do actually need them.

I’m a big fan of online accounts, like Capital One 360, that you will connect to your local bank. When you need the funds, it takes up to 3 business days to transfer to your checking account, but this helps to eliminate any impulsive transfers for non-emergencies.

How Much Do I Need in an Emergency Fund?

For years, we followed Dave Ramsey and read his books, The Total Money Makeover and Financial Peace. Both books provided the blueprint for Our Debt Freedom Plan.

Dave’s first Baby Step is to pull together a $1000 for a starter emergency fund. Later in his plan, he recommends saving 3-6 months of expenses, but only after paying off the non-mortgage debt.

My husband and I see things slightly differently from Dave based on our personal situation, especially the one I described above. We would not have survived with just a $1000 starter fund back in 2007. We are self-employed and $1000 is not a high enough number for a self-employed family’s starter emergency fund.

If you have a stable job, maybe $1000 is a good number to start. Although, as noted above, $1000 is easy to blow through with emergencies, so consider a starter fund of $2000-3000. Only you can determine how much you need in a starter emergency fund.

According to Dave’s Baby Steps, once non-mortgaged debts are paid off, your goal should be to save three to six months of living expenses. This amount is also highly recommended by other personal finance experts. However, given today’s environment, maybe six months to a year is more prudent. Back in 2007, we had about 6 months’ worth of living expenses saved and our savings almost dried up. Saving one year’s worth of living expenses would be wise for us. We are nowhere close to this number and should make this a priority.

Where Do I Find the Money for my Emergency Fund?

I’m glad you asked!

Saving 3, 6, or 12 months of living expenses will take time. We started socking away money for our emergency fund right after we got married when I was still employed as a department store buyer and my husband was just starting his business. In fact, I’m pretty sure we used some wedding gift money to get our fund started.

If you have very little set aside for emergencies, I’m working on a post to help you jump-start your savings.

Part 2 of Emergency Funds 101:  25 Ways to Find Money for Your Emergency Fund.

If you do not have enough set aside for emergencies, I encourage you to start an emergency fund TODAY. It will set you up for financial success.

Do you have an emergency fund? Are you saving for your emergency fund? What questions do you have? Let us know in the comments.