How to Build an Emergency Fund - NerdWallet

How to Build an Emergency Fund

Everyone needs to save for the unexpected. If a medical emergency or sudden job loss hits you or your family, you don’t want to have to think about whether you can afford it. Having a financial buffer can keep you afloat in a time of need and let you recover without going into debt. To build an emergency fund, consider these questions.

How much do I save?

The exact answer to this depends on your financial circumstances and how much insurance you have, but a good rule of thumb is to have enough to cover three to six months’ worth of living expenses. This can give you enough time, for instance, to find a new job or supplement your unemployment benefits until you do. But even $500 in the bank is better than nothing.

Where do I save it?

Since an emergency can strike at any time, having quick access to your cash is crucial. Consider a savings account, since the money will be safe and you’ll be able to withdraw it without hassle. This should be a separate account from one you use daily so you’re not tempted to dip into your reserves.

What steps do I take to build it?

  • Set a monthly savings goal. This will get you into the habit of saving regularly and will make the task less daunting. Contributing a small percentage from each paycheck, for instance, is one way to do this.
  • Keep the change. When you get $1 and $5 bills after breaking a $20, drop some in a jar at home. When the jar fills up, move it into your savings account.
  • Save your tax refund. The average refund is in the thousands, which can give a good boost to your emergency savings. When you file your taxes, consider having your refund directly deposited into your emergency account. Alternatively, adjust your W-4 tax form so that you have less money withheld, and direct the extra into your emergency fund.
  • Cut back on costs. If you’re falling short on saving, see which parts of your monthly spending you can trim. Some ways to do this include carpooling, cooking meals at home, saving leftovers and avoiding small daily purchases like takeout coffee.
  • Get supplemental income. If you have the time and willpower, get a second job or sell unused items at home to accumulate more money for your fund.
  • Assess and adjust contributions. Check in after a few months to see how much you’re saving, and adjust if you need to put in more. This is especially important if you go through a major life event such as marriage or a move to a new city.

Pay off debt or start saving first?

This can be a difficult question, but it’s important to accumulate some savings before concentrating on paying off debts. Here’s why: If you don’t have spare money, one accident or unexpected bill can bring you into more debt.

Although it can be a challenge at first, building up your emergency fund little by little will give you a financial safety net when emergency strikes.


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