How to Build an Emergency Fund

How to Build an Emergency Fund

January 12, 2021
money jar

If you don't get serious about your money you will never have serious money.
~ Grant Cardone

Table of Contents

Important Financial Lesson from 2020

There is no way around it, if you want to be financially stable, an emergency fund is a must. One of the lessons that 2020 taught us is that you have to be able to provide for yourself financially. Not depending on that company to keep the paycheck coming, not depending on the government for a bail out, or anyone else to come to the rescue. Many Americans were already struggling financially before Corona: 80% were living paycheck to paycheck and 61% didn’t have $1,000 saved. 


Why is an Emergency Fund Important

Ask yourself these two questions: Do you have a few thousand dollars saved strictly for an emergency? Are you living paycheck to paycheck? If you are just making ends meet each month and don’t have a sizeable emergency fund you, you are not prepared for a financial emergency.

Peace is one of the things I treasure most and strive to achieve. Peace in my mind, my decisions, my relationships, my spirit and of course my finances. I don’t want to be constantly worrying about what would happen to my family if me or my husband lost our jobs. If the car broke down, would our only option be to put it on a credit card making minimum payments, taking us years to pay off and costing us hundreds extra dollars in interest? Those are not the type of thoughts I want to be entertaining in the middle of the night and I know you don’t want to be either.

An emergency fund gives you a peace of mind knowing that you are prepared for the unexpected.  We know unexpected things are going to happen. Things will break down because they are not made to last forever. I am a huge “Friends” fan (any other Friends fans here?) and this reminds me of the episode when Joey’s refrigerator broke and he was trying to con someone to help him pay for half. It’s safe to say Joey did not have an emergency fund. Joey says to Rachel, “That refrigerator has been in my family since before I was born. It was working fine until you moved in so what does that tell you?” to which she replies, “That refrigerators don’t last as long as people.”

The point of my Friends reference is that all of our material things WILL stop working or break, we just don’t know when. If the TV stops working, you don’t have to run out to get a new one but what if something breaks that is a necessity? Like the water heater in the middle of winter, your car that gets you to work every day or a roof that won’t stop leaking. These are things that need to be addressed right away.

You need to have money set aside for emergencies. Not only for when something breaks but also for the possibility of losing your job. The rent/mortgage will still need to get paid, you and your family still need to eat and that car payment still needs to happen. An emergency fund is for these type of scenarios. You don’t want your only options to be a credit card or borrowing money from a friend or relative. Become financially independent so you can provide for yourself and your family by preparing and planning for these type of situations.

If you skip this step of saving up for an emergency fund, you will regret it. There will be that constant thought in the back of your mind that you aren’t prepared in case something happens and guess what? Something will happen. How much better will you be able to sleep at night knowing you have money saved for not if something happens but when it happens? Remember, financial peace and independence are two things that what we are trying to reach in our journey.

emergency fund


How Much Should You Save

There is no set amount of money agreed by “the experts” of how much you should have in your emergency fund. Some recommend having as little as three months’ worth of your necessary expenses and others as much as one year. I recommend at least six months because according to the U.S. Bureau of Labor Statistics 1, (as of Nov 6, 2020) the average weeks that someone was unemployed between June 2020 and October 2020 was 19.14 weeks; almost five months. We want to be able to have at least a little of a cushion in there.

Something else that you need to consider when deciding how many months of necessary expenses you should save is the type of job that you have. Are you in an industry that is strong or looking to rebound? If so, you can have less in your emergency fund than some one that is in the hospitality industry which had one the biggest job losses because of COVID.

Creating an emergency fund is just building on the foundation of creating a budget. We want to build a strong financial foundation to be able to add to. In my blog, 5 Easy Steps to 50/30/20 Budget I break down what is considered a necessary expense versus a want and show you how to create a budget in 5 steps. If you created your budget following my blog, Step 3 was calculating your expenses so go ahead and pull out that paper. Take the total amount in your necessity category and multiply it by 6. This number gives you a pretty accurate amount of how much you should have in your emergency fund.

For those that haven’t read that blog, I highly recommend it. I go into detail about expenses and how to categorize them between necessities and wants/personal expenses. In short, necessities are things that you need or are required to pay. This includes things such as food, housing, transportation, utilities and debt. So go ahead and calculate the total amount for 6 months of your necessities. This is your magic number!!! Any money that you are saving should be going in your emergency fund until you meet that goal.


How to Save

One of the most enlightening things that I have learned since starting my financial education journey is the principle of Paying Yourself First. Before you start paying anything, put money in your emergency fund. After that, you pay your necessities and then with what is left over you can buy your wants. This way, if you come up short, you will sacrifice a want and not savings or a need.  When paying yourself first, you can start with as little as $50 a month and work your way up to the recommended goal of 20% in the 50/30/20 Rule. Obviously, if you can, start out with a bigger amount; consider this a mandatory priority expense.

Rich Dad Poor Dad

In his best-selling book Rich Dad Poor Dad2 (1997), one of the 10 steps that author Robert Kiyosaki lists for getting started is to pay yourself. This step takes a lot of self-discipline and Mr. Kiyosaki identifies it as the most difficult to master. He states “I would venture to say that personal self-discipline is the number-one delineating factor between the rich, the poor, and the middle class.” (p. 289). This book opened up my mind to new ways of thinking and doing things when it comes to finances, I highly recommend it. It is an easy read since Mr. Kiyosaki doesn’t use a bunch of financial lingo and gives real world personal examples. Click link to purchase it:

Get this principle down and you will be astonished at how far your financial progress will go. If you are living pay check to pay check, this will probably mean you will have to cut back on items in your wants. Start taking control of your finances. You work hard for that paycheck, why shouldn’t you pay yourself first? This principle requires a change in thinking my friends but if you never prioritize saving, it will never happen on its own.

When I first started getting my finances in order, one of the first things I did was set-up an automatic draft for savings. Soon, I didn’t even miss that money because I never actually saw it, I just worked with what I had in my checking account; it was out of sight, out of mind. Eventually, when I checked to see how much I had in there, I was pleasantly surprised at how much I had saved without even realizing it or trying. 

Here is a trick for saving money: make it automatic and have it go into an account that is not easily accessible or visible.  It might mean opening up an account with a different bank, this way you don’t see the balance every time you check your day-to-day checking account and then are tempted to spend it. It also shouldn’t be easily accessible. It should take some work for you to get money out of that account giving you time to determine if you really need it.

When I say not readily accessible I mean you can’t transfer money out of this account and/or take out money using a debit card without having to do one time exceptions. Before I became disciplined in this area, I set-up my account so that I could not transfer money out or take out money at an ATM. At that time bank apps weren’t a thing so I didn’t have to worry about that. The only way I could take out money was by calling the bank and transferring it over the phone. I guarantee you that if I had quick access to that account back then I would have spent that money. You know how disciplined you are; be real with yourself if you are really trying to get your finances in order. 

Where to Save

Where you save your money is important. You want to have it in an account that is accumulating you the highest interest, is not too restrictive and doesn’t penalize you for taking the money out. The average annual percentage yield (APY) for a savings account was 0.09% for the week of September 23, 2020. That means if you had $5,000 in that account you would make about $0.40 a month, which is joke. If you shop around you could find a bank that is paying over 0.5%, still not great but you want your money to be making as much interest as possible. Do your research beforehand and choose the one with the highest APY and best services. Here are links to two articles on the best savings account for January 2021.

I have recently moved part of my emergency fund money to Yotta Savings Bank. This bank intrigued me because not only was I saving money but for every $25 that I have in my account I get a ticket, kind of like playing the lottery. It’s FDIC-insured so your money is safe. The tickets you get provide a fun, fast way to get rewarded for saving. Every day they pick numbers and on Sunday at 9pm ET they release the weekly drawing and determine winnings. 

They guarantee a base 0.2% interest rate but with the lottery tickets you could earn as much as 3% and there is a $10,000,000 jackpot. In October alone, I made $11.61 in prize money; that’s a 2.93% APY. $11.61 compared to $0.40, no contest! I highly encourage you to take a look at this bank and decide if it’s right for you. If you would like to try it out and also get 100 free tickets, download the app Yotta Savings and use my code ANA12.

yotta savings bank

What is Considered an Emergency

Let’s go over what is considered an emergency. There are people that will see their back account start to get bigger and can lose sight of what that money is for. Once you have established your emergency fund, before you touch that money ask yourself the following three questions:

  1. If I don’t get this, what will happen?
  2. Can I hold off on getting this?
  3. Is this a need or a want?

There has to be an immediate medical need or life necessity for going into your emergency fund. Therefore, if you ask yourself question number one and the answer doesn’t include something like “I won’t have a place to live, my family won’t eat, or I won’t be able to get to work”, then you most likely don’t need to touch your emergency fund. With that said, the answer to question number two should be, “No, I can’t hold off on this, I need this now” in order to touch that money.

The need has to involve a basic necessity: food, shelter, transportation and health. That emergency fund is so your family doesn’t go hungry or so they can have a roof over their head. Another very good reason for going into your emergency fund is if you or a family member has a medical expense, that is life or death, that health insurance doesn’t cover. Other examples include getting the car fixed; structural home repairs or appliances like a refrigerator and stove. Lastly, if the answer to question three is “a want”, you already know you shouldn’t be touching that money.

Of course, there are other things that can also be considered an emergency that I didn’t list. Some households might be able to hold off on fixing the washer because they can go to the laundromat. On the other hand, there is a household that can justify using their emergency fund for a washer because there is only one parent who is already working a full-time and part-time job. Having to go to the laundromat would only cause extra stress. If you are not sure if it’s an emergency, ask yourself the three questions above. Base your need on going into your emergency fund on what your answers are to these three questions.

I can tell you some things that an emergency fund is not intended for though: vacations holiday shopping, gifts and reoccurring expenses. Let’s say your friends call and tell you that they are taking a last minute get-away. You have been working hard and have a lot of stress so you really want to go but you don’t have any extra cash and your credit cards are maxed out. (Even if you could put it on your credit card, unless you could pay those expenses off before getting charged interest, do not use your credit card to pay for this vacation either!) Is this a good reason for going into your emergency fund? Absolutely NOT!!!

Some people associate “last minute” and “emergency” together. If you are one of these people, you need to stop doing this. Last minute does not necessarily mean emergency. Once again, ask yourself the three questions: If I don’t get this, what will happen? Can I hold off on getting this? Is this a need or a want?

Your emergency fund is for the things I stated above but I acknowledge that we all have different situations. In addition to the things above, it also comes down to your values. What would you do if a family member calls and asks you to borrow money to pay their rent? Should you go into your emergency fund to help a loved one? Most say you shouldn’t mix family and finances.

There are a lot of things to consider when this decision. Have you let them borrow before? Have they paid you back? How long did it take for them to pay you back? How much are they asking for? Are they asking to borrow money but you see them posting online about the shopping spree they just took last week? I tend to be generous when it comes to helping family but there is a wisdom to it. I am more mindful of letting family borrow money now. This is a personal decision that only you can make.

How to Reach your Goal Faster

In Dave Ramsey’s “The 7 Baby Steps”3, the first step is to save $1,000 for your starter emergency fund. Step 2 is to pay off all debt (except for the house) using the snowball effect and then step 3 is to save 3-6 months of expenses in an emergency fund. Who am I to disagree with Dave Ramsey, but we all have different levels of risk and different things that cause us concern than others.

I have a higher level of risk tolerance than my husband does. A few months ago my husband and I had a choice.  We could use the money we had left over every month to pay off our house early or use that money to invest somewhere else. The two alternative options we were considering were buying more stocks or saving money for our first investment property. Stocks and an investment property have a better rate of return but they also carry a risk of failure. On the other hand, being absolutely debt free would be a huge relief. We would never have to worry about having a place to live for the rest of our lives.

Which choice would you have gone with? We decided that the peace of mind of owning our home outweighed the probability of making money. We are on a plan to pay off our house in 2 years instead of 2046, which is the maturity year of our loan. Paying off our house is a sure thing. The other two options have too many factors that are out of our control and we did not feel comfortable taking that level of risk with the extra money. This is an example of how your values, risk tolerance and current situation play into your financial decisions. Although there is plenty of “financial-expert advice”, finances is not a one size fits all.

The amount of debt you have is also an important factor in your decision. Let’s say you have $40,000 in debt. How long will it take you to pay that off before you can get back to building your emergency fund? Are mentality ok with that timeline? For me, not having an emergency fund would keep me up at night. We all know that the longer it takes you to pay off a credit card the more money it will cost you. For some people, it’s more important to pay less in interest than to have a fully funded emergency fund. Once again we are all different, so weigh out what is the best decision for you and your family.

So, in my humble opinion, you want to reach your emergency fund goal as soon as possible so you can start working on your other financial goals. You can reach your goal faster by transferring any extra money you have left over after you have paid all your bills, to your emergency fund. Make it a habit to check your checking account after you have paid your bills and only leave enough in there to get you through until your next pay check. Put the rest in your emergency fund.

Don’t Stop

Whether you decide to save $1,000 or 3-6 months for your emergency fund don’t get discouraged with how long it will take you to reach your goal. Depending how much you are saving every month, it might take you a few years and that is ok. Don’t stop until you have reached your goal. You are working towards a goal that 77% Americans haven’t reached and that should make you proud and motivate you.

Having an emergency fund will get you so much closer to getting control of your finances. It’s a relief to know that you have money in case you need it. I started to sleep a lot better once I had created my emergency fund because I knew that no matter what happened, my husband and me could get by for a few months. It is liberating to have money set aside for an emergency.

1 Bureau of Labor Statistics. (2020, November 6). Table A-12. Unemployed persons by duration of unemployment.

2 Kiyosaki, R. (1997). Rich Dad Poor Dad. Plata Publishing.

3 Ramsey, David.

To your finances,

Ana G
Ana G.

Ana G.

Wife, Mother, Soldier, Self-Development Coach, Entrepreneur, Philanthropist

Ana G.

Ana G.

Wife, Mother, Soldier, Self-Development Coach, Entrepreneur, Philanthropist

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