How to Build an Emergency Fund from Scratch
An emergency fund is like a safety net for your money — it helps you handle unexpected expenses without affecting your finances. Unexpected expenses can be anything from smaller costs, like car repairs, to huge issues like job loss. No matter how big or small, having money set aside gives you a sense of security when you really need it. It stops you from making quick money choices or getting into debt so you can deal with the problem while protecting your long-term financial health.
Recently, both of our showers started leaking within a week of each other, and our emergency fund saved the day. Setting aside cash each month for unexpected costs isn’t very exciting, but the relief we felt knowing we could cover the plumbing repairs made it totally worth it.
Here’s what you need to know about how to build an emergency fund.
Key Highlights
An emergency fund is a separate savings account that covers unexpected expenses and financial emergencies.
A fully-funded emergency fund should ideally cover three to six months of living expenses, providing a safety net during difficult times.
To start building, determine your monthly expenses and identify areas where you can reduce non-essential spending.
Setting up a dedicated savings account and automating transfers from your checking account can help you consistently grow your fund.
Consider supplementing your savings with windfalls like tax refunds or bonuses to accelerate the growth of your emergency fund.
What Is an Emergency Fund?
An emergency fund is a stash of cash for surprise costs or financial trouble. It differs from your normal savings, which you might use for a vacation or buying a house. Emergency savings are only for unexpected things — like a medical bill that insurance doesn’t pay or the loss of your job.
Having this safety net gives you peace of mind. You can face surprise events without messing up your finances. It helps you avoid debt and means you won’t have to depend on credit cards or loans, which often come with high interest and stress.
How Much Should You Have In an Emergency Fund?
Determining the ideal amount for your emergency fund depends on your circumstances and risk tolerance. While there’s no one-size-fits-all answer, a general rule is to aim for three to six months’ worth of living expenses.
Consider your monthly expenses, including rent or mortgage payments, utilities, groceries, transportation, and debt payments. Multiply that figure by three to six to determine your savings goal. For instance, if your monthly expenses total $2,500, your target emergency fund should be between $7,500 and $15,000.
Adjust the savings goal based on additional factors like job security, health conditions, and dependents.
HOW TO BUILD an Emergency Fund
Step 1: Set Up a Dedicated Savings Account
Start by opening a savings account that’s separate from your daily checking account. This way, you won’t be so easily tempted to spend the money once it starts to build up. Having a separate account also makes it easy to see how much you have saved. Look for a high-yield savings account with a good interest rate to help your money grow — usually around 5%.
Consider opening this savings account at a bank or credit union that’s different from your checking account to help you think twice before taking money out on impulse. Also, check out online banks, as they often have better interest rates than regular banks.
Step 2: Evaluate Your Financial Situation
Before you start saving, look at your current financial situation. Start tracking your spending for a month or two by using budgeting apps, checking your bank statements, or writing down your purchases in a notebook. Group your expenses into fixed costs like rent or mortgage, daycare, bills, and debt payments, and variable costs like groceries, entertainment, and dining out.
After you have a complete picture, evaluate your spending habits. Find places where you’re spending too much or where you could cut back on things that are not essential. This will help you save more money for your emergency savings.
That said, remember that budgeting isn’t about taking everything away. It’s about making smart spending choices that help you reach your financial goals faster. By knowing your monthly costs and areas to trim your spending, you’ll have more cash flow to add to your emergency savings.
Step 3: Create a Budget Plan
Once you understand your current financial situation, it’s time to make a budget plan. By making a budget that suits you and regularly checking your spending, you can manage your monthly costs and set aside money to grow your emergency savings. There are many budgeting methods that you can choose from, but the best option depends on you and your brain.
You might prefer using a pen and paper, a spreadsheet program, or different budgeting apps. Pick a method that works well for you and makes it easy to see your cash flow. The main point is to find a system that lets you be as consistent as possible and don’t get discouraged if you struggle or make mistakes.
STEP 4: Set a Realistic Emergency Fund Goal
Many people say you should have three to six months of living costs in your emergency fund, but I believe in a more tailored approach. Ultimately, it’s best to set a savings goal that aligns with your financial situation and that you can stay committed to long-term.
If you’re starting with nothing or have little money left after bills, don’t let that big number scare you. Start small and work your way up. If there’s room in your budget, you could aim to save $50 or $100 each month. As you get better at saving and find ways to have more cash flow, you can save more each month — or aim to set aside money each week if your income allows for it.
In the end, saving any amount is better than saving none. Even a small emergency fund helps with unexpected expenses and can keep you from going into debt. Focus on building consistency and taking small steps forward instead of stressing about a big, scary goal.
Step 5: Identify Areas to Cut Back
After outlining your goals, look for ways to cut down on non-essential expenses. At first, this might feel overwhelming. However, small cuts can lead to big changes. Check your variable costs and find ways to save.
Consider these areas for cutting back on spending:
Dining Out: Try to eat out less and choose cheaper options like cooking at home or prepping meals.
Entertainment: Review your subscriptions for streaming services, magazines, or gym memberships. Cut back or cancel the ones you don’t use often.
Impulse Purchases: Pay attention to what makes you want to spend money. Set up rules to help stop yourself from buying things on a whim. Try a “waiting period” before buying anything that isn’t essential.
By actively reducing non-essential expenses, you can increase your cash flow. This extra money can help build your emergency fund and speed up your savings goal. Get my list of 101 ways to reduce your spending to start cutting back today ✨
Step 6: Automate Your Savings
One good way to save money regularly is by automating your savings. Most banks and credit unions allow you to set up automatic transfers from your checking account to your savings account. You can pick how often and how much money to transfer based on when you get paid and what your budget is.
When you automate your savings, you don’t have to rely on building a new habit and you don’t have to worry about moving money yourself. Treat these transfers like important bills, such as rent or utilities, and you’ll be well on your way toward financial stability and peace of mind.
Step 7: Celebrate Small Wins
Recognizing and celebrating small victories in your savings journey is critical to maintaining motivation, especially for ADHDers. Rather than indulging in extravagant treats that could throw your budget off balance, consider more sustainable and enjoyable forms of celebration. Treat yourself to a low-cost activity like a day at the park, a movie night at home with your favorite snacks, or a small item that you've had your eye on but would typically overlook.
The key is to choose rewards that bring joy without jeopardizing your savings goals. By intentionally linking your accomplishments with positive experiences, you can create a reinforcing cycle that encourages continued progress.
Step 8: Monitor and Adjust Your Savings Plan
Remember to check your savings plan often once your emergency fund is ready and you’ve set up automatic deposits. Doing so lets you see how you’re doing, celebrate your wins, and adjust things as needed. Life can change, and your savings should change, too.
If you get a pay raise, think about saving more money automatically. Likewise, if you manage to lower your monthly costs by finding cheaper rent or a better phone plan, move that extra money to your emergency fund. Every now and then, look again at your emergency savings goal. Try to keep a balance that matches your current monthly costs and any possible future expenses.
Final Thoughts
Having an emergency fund is an important step toward financial stability. Start by understanding the basics of saving, evaluating your expenses, and setting realistic goals for your fund. You’ll find it’s easier to grow your fund by automating account transfers, saving extra money when possible, and cutting back on non-essential expenses. Financial emergencies can happen at any time, so the best time to start preparing is today!
Frequently Asked Questions
How long should it take to build a fully-funded emergency fund?
As a general rule, try to save enough money to cover three to six months of your living expenses. The time you need to reach this goal will depend on your income, expenses, and how much you can save. Look at your financial situation to adjust your savings plan. Focus on being steady with your savings rather than rushing to reach your goal.
Can I invest my emergency fund for higher returns?
Putting your emergency fund into high-risk investments is usually not a good idea. The main goal of emergency savings is to ensure the money is easy to access and protect your capital — not to chase after high returns. Instead, choose a high-yield savings account that lets you reach your funds when you need them without worrying about losing any value or paying fees.
