How to Build an Emergency Fund

Setting up an emergency fund is a vital part of protecting yourself against life’s unexpected events. It’s impossible to avoid the unexpected — whether it’s an overheating radiator or an emergency medical bill. Saving money for an emergency can help offset these costs and give you peace of mind, knowing you’re ready to face the future. 

Yet, many people fail to build emergency savings; in fact, more than half of Americans would be unable to pay an unexpected expense of $500. When setting up an emergency fund, some simple guidelines can help. Consider these emergency fund savings tips to be prepared financially for an emergency.

What Is an Emergency Fund?

Put simply, an emergency fund is a type of savings account. But not all savings accounts are for emergencies! You might be saving for your child’s college tuition, a new car, a vacation to a faraway place or a dreamy kitchen renovation. 

Emergency funds are decidedly less fun than all of these. But they’re absolutely critical to secure your financial future. A broken dishwasher might just be a $1,000 inconvenience — or it could be a serious setback. What if you lost your job, had emergency surgery or experienced serious property damage? That’s a costly recipe for debt and stress. An emergency fund, which is its own dedicated savings account, can give you peace of mind should the unexpected occur.

How Do I Set Up an Emergency Fund?

Most people know they should have an emergency fund, but some simply don’t make enough money to start one, while others just put it off. 

If you struggle to save money because of low income, you can look for ways to make extra money in the short term. Work extra hours, drive for a rideshare company, take on freelance work or sell items you don’t need — it all can help. Your goal is to build a savings fund sooner rather than later. You never know when your next emergency will happen.

If you have the income to start an emergency fund now, stop avoiding it. The best way to begin is to add the fund as a line item when you create your next monthly budget, then build your emergency fund as fast as you can. Now is a good time to review your discretionary funding and see what you can cut back on — then redirect that cash to your emergency fund. Ideally, you’ll kickstart your fund with a larger “payment,” then schedule regular monthly contributions to your dedicated emergency fund savings account. A savings app can even help you save automatically, so you’ll never forget — or “forget” — to store money in your savings.

How Much Should I Save In My Emergency Fund?

It’s different for every person. Start with what you can afford and add to your emergency fund on a regular basis until it’s fully funded. You might also consider contributing unexpected cash, like gifts, bonuses or tax refunds. 

A good rule of thumb is that a well-stocked emergency account should include three to six months of expenses. For example, if you have $2,500 in monthly expenses, then you should have between $7,500 and $15,000 stowed away. If you lose your source of income unexpectedly, you’ll have bought yourself time to get back on your feet.

Consider a longer-term emergency fund if you happen to be your home’s sole earner, or if your career comes with a fluctuating income. Just imagine if you have several slow months that coincide with a large, unanticipated expense. With savings set aside, you’ll be better prepared to cover the costs. Parents, too, should establish a larger emergency savings fund whenever they’re able. When there are kids involved, any financial crisis can feel more stressful.

Should I Invest My Emergency Fund?

It can be tempting to invest your emergency savings in mutual funds or other assets, but it’s important to resist this urge. The best thing you can do is keep it in a simple savings account with no risk of loss.

The goal of an emergency fund is to provide you financial security, and you don’t get that if your fund becomes a financial investment. Plus, keeping a simple savings account makes your fund more liquid, allowing you to withdraw at short notice.

However, you may want to consider a high yield savings account (HYSA), as long as you can access your savings quickly. Some require a minimum opening balance or a higher balance requirement, so be sure you know the regulations before you open the account. But the benefits are clear: a HYSA often accrues much more interest than average bank savings accounts, and that means you’ll benefit from compounding interest — especially if you’re leaving a large amount of money in the account.

When Should I Spend My Emergency Fund?

Most financial “emergencies” aren’t true emergencies. A real emergency is unexpected and critical, like fixing a broken car that you need to get to work or sudden dental surgery. If your car tires are four years old, you’ll likely need to replace them soon. If it’s October, the holidays are around the corner, and you should budget for additional spending. These circumstances aren’t the kind of dire, unexpected events your dedicated fund will carry you through. Plan for known financial needs without using your emergency fund and reserve that money for true emergencies.

Build Your Emergency Fund With Urgency

Don’t delay planning your family’s emergency fund a second longer. Contact your Farm Bureau agent or advisor today and ask them about smart budgeting tools that can help you build up your savings.