7 Steps To Build An Emergency Fund

To continue supporting Financial Literacy month, the next article will focus on something near and dear to my heart……. an emergency fund. We’ll talk about what is an emergency fund, why you need it, and 7 steps toward creating an emergency fund.

So What’s An Emergency Fund?

An emergency fund is a bank account with money set aside to pay for large, unexpected expenses that can help you through a tough time. Having funds available for emergencies is an essential component of your overall financial health.

The best place to have this money is in a high yield (high interest rate) savings, checking, or money market account. It should be a separate account from the normal account you pay bills from. Don’t co-mingle the funds because it’s way too hard to keep track of what is in there for emergencies.

The key components of the account chosen should be:

  • Needs to be easily accessible
  • Needs to be easily converted to cash (aka easy to make “liquid”)

It’s ok to invest some of the money as well if you choose but just make sure that at least 3 months (preferably 6-9 months) is liquid in the account before investing the rest. Sometimes you need to draw on it at a moment’s notice and easy access is essential for that.

Emergency Fund

Ideally you have a minimum of 3 months of expenses in this account with an ideal situation of 6 months. If a single income family or you have variable monthly income (i.e., think salesperson on 100% commission, seasonal construction worker, teacher, independent consultant, etc.) then 9-12 months should be the target.

I like to call it, “my peace of mind fund”. When I have enough funds in my account, it eases my anxiety. Having enough funds on hand lets me be my best self because I do not have to worry what might happen if I was caught with my proverbial pants down. It’s happened to me before.

What Is Considered “An Emergency”?

About 15 years ago when the economy was in the midst of the Great Recession, I was an unfortunate casualty of my company having forced layoffs to keep themselves financially afloat. At the time we were swimming in debt from my son’s medical bills.

We were focused on paying down debt at the time because I thought my job was safe. We only had about 3 months of emergency funds on hand and at the time, we were a single income family. The experts state that if a single income family, you should have at least 9-12 months of expenses in your emergency fund. As you can probably guess, we were financially screwed.

It’s an understatement to say we were freaking out. We needed COBRA insurance because of my son’s medical condition, and we were hemorrhaging money. Luckily, I found a new job within the next 3 months and we managed to build the emergency fund back up.

It took a couple of years to do this because I initially had to take a HUGE pay cut (~40%) since it was the only job being offered at the time. I didn’t like it, but you do what you must in order to take care of the family…….

I know what it is like to be in a dire financial situation. I know the thoughts and feelings going through a person’s head and it is not a pleasant experience.

Here is what constitutes “an emergency”:

  • Unemployment
  • Unexpected events (major car or home repair)
  • Unexpected health issues
  • Sudden death in the family

So when we talk about “an emergency”, we are talking about a huge, potentially catastrophic event. Don’t think they will never happen to you because it can happen.

What would you do if:

  • Your roof leaks?
  • Your transmission is damaged?
  • You need surgery and have high deductible insurance?
  • You lose your job?
  • You go from 2 incomes to 1 income?

How would you handle it? Enter the emergency fund. It’s your lifeline to good financial health.

On the flip side, here is what DOES NOT constitute as an emergency:

  • That Gucci purse that you MUST have
  • The Ducati motorcycle that is calling your name to “buy me”
  • That trip to Hawaii that you paid for using your credit cards

I hope you can see the point. One person’s “emergency” is another person’s “want”.

I know what you are probably thinking, “6 months of expenses in an emergency fund when I am barely scraping by now….. holy sh@! he’s nuts!”. Trust me when I say it’s achievable and you’ll thank yourself when you do.

Let’s talk about the 7 steps you can take to build your emergency fund.

Set A Savings Target

It can be tough to get started especially if you have been living paycheck to paycheck with nothing leftover. Trust me when I say that spare money is hiding in the weeds, and you just need to change your perspective to find it.

Before you can change your perspective, you need to know where your money has been going. The best way to understand where your money has been going is to create a budget.  It’s important to know where your money is going in order to find ways to save and to build the emergency fund.

Budgeting helps you to maximize income utilization and manage your spending all at the same time. I talk about how budgeting sets you free here and I talk about different budgeting methods here.

You can create a budget the old fashioned way by tracking all the expenses on your bank statement for the last 3 months by hand or you can use a budgeting app like Mint or Personal Capital or M1 Finance to do it for you.

Whatever you need to do to get started just do it. What we are looking for are ways to free up cash that can be used to create your emergency fund. I like to call it, “plugging the leaks”.

For example, any unused online subscriptions? Get rid of them. Been eating out 5 nights a week? Start making meals at home. Like to buy designer clothes? Taper off on the splurge. Buried in student loan debt? Look for ways to consolidate the debt and lower your monthly payment.

The money is out there, and budgeting helps to set your priorities to decide what’s important to you. Figuring out how much money that can be freed up from plugging the leaks will set you on the path to financial success.

Your savings end goal or target should be at least 6 months of expenses. If a single-income family shoot for 9-12 months of expenses. These are just rules of thumb. The amount you need in emergency savings varies from person to person because no 2 situations are alike.

If you’re freaking out wondering how the hell you’ll ever get 6 months of expenses saved up, then let’s check out step 2 which I call:

Chunking The Elephant

One of my favorite project management sayings that has become like a mantra for me is, “chunk the elephant”. This means that you take a problem that seems unmanageable and figure out how to break it down to its most simple yet manageable components.

It’s like a video Wil Smith put together a few years ago about “laying bricks”. His goal every day is to lay 1 brick and to make it the best brick he can lay that day. You’ll have some good brick laying days and some bad brick laying days, but the objective is to lay the best brick YOU can lay that day.

Chunking The Elephant

Chunking the elephant is very similar. Let’s say for example that you make $5,000 a month after taxes and have $4,700 a month in expenses. The 6-month emergency fund target is $28,200 (6 * $4,700 = $28,200).

This can seem really daunting and overwhelming especially when you only have $300 a month leftover to put towards the emergency fund. It’ll take you 94 months (~ 8years) at that rate to save up a 6-month emergency fund! Holy s&*t!

Enter chunking the elephant. Break this down into its smallest components.

Set an immediate goal of getting a $1,000 emergency fund. That’s it. Just a $1,000. It’ll take you about 4 months to achieve that. Congratulations! Saving just a $1,000 puts you ahead of a lot of people in the U.S. and will get you out of a lot of mishaps. Seriously, that is something to be proud to achieve and to be grateful for.

Next set a goal of $2,000…… then $4,700……. then $6,000…… and so on. Take it slow and steady. Over time your income will go up and your expenses will stabilize.

For example, let’s say the following year, you have $3,600 in your emergency fund and you just received a raise at work. You’re making $5,200 a month and your expenses have stayed the same at $4,700. Now you have $500 a month to put towards the emergency fund! You’ve just cut your time by about a third to achieve your goals of $28,200 (goes from 94 months down to about 61 months)!

Over time, if you stabilize your expenses and just bank the raises, you’ll have that 6-month emergency fund before you know it.

The key is to just get started by laying the 1st brick and chunking the elephant…. But what if you don’t know how to get started? Let’s look at steps 3.

Create A Savings Habit

Next you need a quick and easy system for making consistent contributions. You need something that is automatic, so you don’t have to think about it. The best and easiest way to do this is to setup direct deposit from your paycheck.

Most employers will let you automatically deposit your paycheck into more than 1 account. It takes only a few minutes to setup and then you can forget about it. Just let your employer do all the work for you…. It’s the least they can do! Lol 😊

Over time as your wages increase, go in and reset the amount so the extra money coming in goes straight to the emergency fund. Even just increasing the amount by 1% year over year can have a HUGE impact to the emergency fund!

Lastly, make sure you add the amount you are saving to your budget. It is actually fun seeing the amount grow year over year and can make you feel empowered. It’s a beautiful feeling! 😊

Chart Progress

Wondering how you are progressing towards the end goal? Then chart your progress. The project manager in me loves to measure how I’m doing and how much I’ve accomplished towards my goals.

Now you can do several things for charting progress. Apps such as Mint or Personal Capital or M1 Finance can do it for you. If you like to do it yourself, you can use good ol’ Excel or a Google spreadsheet to set up your own performance chart and metrics.

Charting your progress helps toward understanding if on track or if you need to course correct. Odds on, there will be some bumps in the road along your journey. It’s ok because that’s part of the process. Knowing when off course makes you aware that changes might be needed to get back on track or it may even cause goals to be re-adjusted. That’s ok. It’s all part of the process.

I’ve learned to enjoy the process just as much as enjoying when I have hit a goal. You learn a lot about yourself and what you’re capable of by charting your progress.

What if you are way off course and have done everything you can think of? Time to think outside the box and figure out ways to generate more income.

The next section will go through some examples.

Find Ways To Boost Income

Falling short of your goals and think there is nothing else you can do? Time to get creative! You may not realize it, but there are several things each person can do to boost their income. Here are a few examples.

Sell Some Stuff

We all have things we don’t use anymore like old bikes, motorcycles, comic books, trading cards, quilting patterns, make-up, end tables, chairs, watches, jewelry, etc.  Why keep it? Why not sell it?

The Monopoly of Life

I know how this goes, I have a comic book collection I have had since I was a kid and did not want to part with. I store it at my mother’s house because, quite frankly, my house is packed with stuff already! Raising 3 kids will do that! 😊

A quick and easy win could be selling some of that stuff and add the extra money to your emergency fund. As they say, one person’s old goodies are another person’s treasure. You would be surprised what a person will purchase. Don’t believe me? Shop eBay for anything and see. You pick it, they probably have a market for it. Vintage concert posters, sewing material, cake decorating sets, dolls, Pokémon cards, the list is endless.

I knew a now retired co-worker who saved all of his old Rolex wrist bands. Some of these were 40 years old. Turns out that, at the time, there was a huge market for this on eBay. He made thousands selling his vintage Rolex watches and wristbands. He used this money to help purchase his retirement home… true story.

1-Time Bonuses

Almost all receive of us receive a 1-time bonus throughout the year aka tax refunds! Using your tax refund is a great way to get an instant boost to your emergency fund. Most people don’t use this money as part of their monthly budget so it’s like getting a performance bonus from Uncle Sam!

Speaking of performance bonuses, if you receive performance bonuses throughout the year from your employer that is also another way to give your emergency fund a shot of adrenaline! Most people I know spend their bonus on things they want: a vacation, a new boat, down payment on a vacation home, etc. Why not use it to boost your emergency fund instead?

Start A Side Hustle

In a previous article, I’ve talked about the benefits of starting a side hustle and how it can expedite your journey to financial freedom. What I didn’t tell you is that it can also expedite your journey to building your emergency fund.

We all have skills that can be leveraged for extra money. If you are handy, setup a handyman side business for your neighbors. If proficient in software coding, do freelance work thru Fiverr. Do you pour a mean Long Island Iced Tea? Go work as a bartender! The possibilities are endless.

If not wanting a demanding side hustle, go work in retail or the service industry. Around my area, the starting pay is around $15/hour. May not sound like much but working a couple of 5-hours shifts a week could put an extra $600 a month in your pocket! That goes a long way toward building up that emergency fund.

Use Technology To Your Advantage

As I mentioned above, there are dozens of money mobile technology apps that can help with tracking and saving you money. That extra money is free and could go straight towards your emergency fund.

Using apps like Acorns can help you save and invest spare change that can be used to fund your emergency money pool. It’s like a digital coin jar that can really add up over time.

Another less well-known cash app is Qaptial. Qapital rounds up your purchases to the nearest dollar and moves it into a savings account associated with your goal. You can set and name specific goals on the app to apply the money to (like “Emergency Fund”) 😊 lol.

There is a plethora of ways that technology can help you save money. Go check it out to see for yourself.

Celebrate The Wins

Finally, make sure to celebrate the great progress being made on your financial journey. At this point, you’ve been working your ass off for awhile so now it’s time to celebrate!

For example, after you save that 1st $1,000, treat yourself to celebrate the milestone. Nothing extravagant (after all you don’t want to spend the entire $1,000 celebrating! Lol) but something simple and meaningful. Maybe it’s going to buy a new pair of shoes. Maybe it’s buying a belly-buster pizza at your favorite pizzeria. Whatever it is, use that time to congratulate yourself for a job well done!

It’s important to recognize what you have accomplished and to reinforce that all the hard work you have been doing is panning out. Way To Go!

What if you hit your last milestone and now have 6 months of expenses saved up? Figure out a new goal. There is always another mountain to climb so find that mountain and go for it!

Bottom Line

No matter what all the personal finance gurus tell you, developing a system for saving up money is not easy. It takes changing some behaviors and developing the right mindset.

Give yourself permission to fail along the way. There will be bumps in the road just don’t let the bumps turn into car-swallowing holes. Nip bad habits in the bud and be your best self.

Take Action

Emergencies can and will happen whether you are prepared or not. Trust me, being prepared is the best way to handle the situation.

An emergency fund can not only help with unplanned events, but it can also eliminate the reliance on credit cards to bail you out of financial jams.

Lastly, make sure the emergency fund is a different account than the one you use to pay the bills. It makes it way easier to track progress and doesn’t co-mingle your funds.

The savings game is mostly psychological and winnable. Even if you are starting from nothing, setting small amount of money aside will lead to a big difference in the long run. It just takes time, patience, and a little discipline.

Now go for it, you got this!

Until next time……..


Live The Life You Love, Want, And Deserve 😊