7 Steps To Build Your Emergency Fund Even If You Can’t Save

building an emergency fundI can still remember it like it was yesterday. I had just bought my new house, one that I could barely afford. I was living in it for maybe 3 weeks, when I came home to a house that was hotter than the Sahara Desert.

Luckily for me, during the hottest heat wave of the year, my air conditioner broke. I didn’t think it was a big deal since I negotiated for a home warranty from the seller when I bought the house.

I called the warranty company and learned that I had to use their service repair company. I also learned that I had to pay $50 just to have the company come out and look at my air conditioner.

I agreed and sweat through the night until a tech could come the next afternoon.

He looked over the unit and determined the issue. To my surprise, the issue would not be covered under my home warranty. In order to fix my air conditioner, I was going to have to pay $1,500.

My saving grace was that I had built an emergency fund for situations like this. Otherwise, I would have had to put the repair on my credit card and work to get out a debt.

Unfortunately, many people reading this don’t have an emergency fund and go into debt every time something unexpected happens.

But you can easily change this.

I am going to show you why you need to start building an emergency fund and how to quickly fund it. Let’s get started.

Building An Emergency Fund

What Is An Emergency Fund

An emergency fund is the term given to a savings account that acts as a resource to provide you with income during emergencies. Over time, you are building an emergency fund to get it to the amount of money you need to live off of should an emergency arise.

Emergencies include needing a new hot water heater, paying the deductible on your automobile policy after an accident, etc. An emergency is not a sale at your favorite retailer or a new car.

Emergency funds are also used to allow you to pay your bills should you lose your job. Therefore, building an emergency fund up is essential in order to cover these situations.

In an ideal world, you will never touch your emergency fund. However, the world is far from ideal and you will end up using your emergency fund.

Why Build An Emergency Fund?

You know that an emergency fund will help you get through tough financial times, but is building an emergency fund really necessary? The simple answer is yes!

Think about your life if you were to lose your job. It would be pretty stressful right? Just the shock alone would be tough to handle.

Now add in the additional stress of trying to find a job that pays just as well. But we aren’t done adding in the stress.

Think about all of your bills every month you have to pay. Water, electric, rent or mortgage just to name a few. How are you going to cover these?

Some might look to their credit cards. This is a bad idea. Well, at first it might not seem so bad. You have the available credit to help you out. But as time goes on, this is just another bill you have to pay back.

And the kicker is that you have to pay the original amount plus interest. Suddenly you aren’t just paying your electric bill. You are paying your electric bill and 20% more because of the interest.

As you put more expenses onto your credit card, you simply speed up the debt cycle and create an entirely different world of hurt.

This is why you need an emergency fund.

It helps to take one piece of the stress out of the equation. When you have money set aside for tough times, you can focus all of your attention on finding a new job, not worrying about how to pay your bills.

I have another example of how an emergency fund saved me. This time is was more stressful than a broken air conditioner.

Back in 2013, I was laid off. It came out of the blue. The company was doing well and everyone at my place of employment was talking about how great of a job I was doing. But on that Tuesday morning, the owner called me into his office and told me the news.

I was stunned. It was 2 months before my wife and I were getting married.

The reality didn’t set in until a day or two later. Fortunately for us, we had a fully funded emergency fund. With the stress of trying to find a new job and finalizing wedding and honeymoon plans, I couldn’t begin to imagine life financially had we not had money set aside.

What Should The Size Of Your Emergency Fund Be?

Now that you know why you should build an emergency fund, how much money should you have in it? Many financial experts recommend building an emergency fund to 3-6 months worth of your monthly expenses.

So if your monthly expenses are roughly $2,000 per month, your emergency fund should contain between $6,000 and $12,000.

However, I feel that this amount is too conservative. The reason is because if you lose your job, there is a chance you will not find a replacement that pays as well as your old job in 3-6 months. What happens in months 7, 8 or 9? Where is the money coming from?

Many will resort to using their credit cards to get by. As I mentioned earlier, this is a bad idea. By doing this, you are creating more headaches down the road.

To avoid this, I recommend building an emergency fund to 6-12 months of your living expenses. Using our hypothetical $2,000 expenses per month figure above, this means you need between $12,000 and $24,000 in an emergency fund. I realize this amount seems high. But you will be grateful when you have it saved.

You will have peace of mind that should the unthinkable happen, you are in good shape for a at least 6 months, or ideally a year.

8 Ways To Building An Emergency Fund Fast

Now, you may be thinking how do I go about building an emergency fund to one year’s worth of expenses? There are numerous ways to build up your emergency fund.

Before I mention the ways, I want to point out that I am not telling you to completely change your way of life just to build up your emergency fund. Keep living your life. Just make a few changes and the money will add up.

Here are a handful of ways for building an emergency fund.

#1. Create A Budget

If you don’t have a budget, you need to create one. Doing so will allow you to see where you are spending your money and will help you spend it smartly.

I know what many of you are thinking. The idea of creating a budget sounds painful. It really isn’t.

You have 2 options when it comes to building your emergency fund. The first is the manual route. Here you take an excel spreadsheet and track your income and expenses. You can find 10 free spreadsheet templates in this post.

The second option is an automated one. The best option here is Personal Capital. You link your accounts and track the budget categories you want to monitor. As you spend, Personal Capital will automatically update your categories. You can learn more here.

When it comes to saving money through budgeting, most people fail at saving because they are trying to save what is left after they spend their money. The problem with this idea is that most people spend everything they have so there is nothing left to save.

Reverse this by saving first. Set up an automatic transfer from your checking account to your savings account for $20 a month. With the money getting transferred automatically, you will never miss it and your emergency fund will grow.

In addition to this, use Worthy Bonds to help you save. They round up purchases you make to the nearest dollar. For example, if you spend $21.15 on an item, Worthy will round this up to $22.00 and transfer $0.85 from your checking account to your savings account.

Once you set up you free account with Worthy Bonds there is nothing left to do. Since I’ve started using their free service, I’ve saved close to $1,000 just by rounding up my purchases. You can learn more here.

#2. Revise Your Budget

If you are spending $150 month dining out, cut it back to $100 and set up an automatic transfer to your emergency fund for the $50. See if you can reduce your cable package and save some money there.

There are numerous areas to cut back and by looking over your budget and making small tweaks here and there, you can easily find additional savings.

By just looking over your larger expenses and finding ways to trim them back you can easily save close to $1,000 a month.

You should also be looking at switching to other companies to save money. For example, I use Cricket as my cell phone provider. They use the same towers as AT&T so my coverage has not changed.

The only thing that has changed is my monthly bill. I get unlimited calls and texts and 3 GB of data for $35 a month. This is saving me $60 a month! If you sign up with Cricket, use this link. You will get a $25 credit for your first month.

#3. Transfer Savings To Savings

When you go shopping, look at the bottom of your receipt. Most likely there will be listed the amount you saved. Take that “savings” and transfer it to your emergency fund. I only do this for my grocery shopping and transfer a healthy bit of money over the course of a year.

But you could do this any place you spend the money. I average around $1,000 a year in savings just from this tip alone.

#4. Use Technology

I use 2 pieces of technology when I shop. Receipt Hog and eBates. Receipt Hog is an app on my phone. I take a picture of my receipt with the app and get coins or spins (basically chances to win more coins).

After I collect a certain amount of coins, I redeem them for cash in my PayPal account. To sign up for Receipt Hog for free, click here. If you use my referral code: skiv8225, you’ll earn bonus spins for a chance to win more coins after you submit your first receipt.

eBates is an online shopping portal. You can read all about them in this post, but basically by going to a retailer through the eBates website, you earn cash back. Every quarter, eBates sends you a check or puts the money in your PayPal account. You can learn more about eBates here.

And then there is a third piece of technology to consider. It is called Trim. It analyzes your spending and point out ways for you to save money.

For instance, it might find gym memberships or subscriptions that you no longer use. By canceling these, you save yourself money.  Or it looks at your cable bill and tries to negotiate it to save you money. You can learn more about Trim here.

By doing all of these, you can save an extra $100 or more per month to put towards your emergency fund.

#5. Save A Portion Of Your Tax Refund

If you get a tax refund each year, take a set percentage of it and transfer it to your emergency fund. Since most look at a tax refund as extra money, you should be saving a healthy portion of it and using a small portion for spending.

This assumes you have all of your high interest debts paid off. Understand I am not saying you need to save 100% of your tax refund. Take 15% to spend on whatever you want and put the rest in an emergency fund.

You should only have to do this one or two years and then your emergency fund should be at the amount you need it to be at.

#6. Ignore Raises

If you get a raise, ignore it. Take out your last paycheck prior to the raise and compare it to your new paycheck. Find the difference and set up a transfer to move that amount from your checking account to your emergency fund each time you get paid.

You’ve been living off your old salary, so you can do it for a little while longer. When you don’t do this, you become accustomed to more money in your checking account and end up spending more money.

Don’t make this mistake. Save the money from the start and you will never miss it.

#7. Save Your Change

You should be paying for most everything in cash. When you come home from a shopping trip, take all of your loose change from your pocket and put it in a jar. Each month, take the jar, count the coins, and deposit that amount into your emergency fund.

If on the other hand you pay with credit cards, take the cash back amount you earned and use that to pay a portion of your monthly bill. Then take that amount of money from your checking account and transfer it over to your savings account.

So if you have $100 in cash back, use that to pay your bill and then transfer $100 to your savings account.

#8. Earn More Income

There are 2 ways to earn more income.

  • Get a raise
  • Start a side hustle

Getting a raise is a simple process but you have to follow it in order to get the highest raise. You can check out this post for how to go about doing so.

Starting a side hustle is a great way to earn more money that you can put towards your emergency fund. This post highlights over 50 ideas for you to start today. For me, blogging was my side hustle for many years. I was making a few thousand every year and this money went straight to savings. It really boosted our investments and our net worth.

Where To Build Your Emergency Fund

Where should you build your emergency fund? Ideally, you want your emergency cash in liquid accounts, such as savings accounts and bank certificates of deposit (CD’s). Even if you do have some of your emergency fund in CD’s, there should still be a decent amount (at least $5,000) in a savings account.

This way you can quickly access it. With CD’s or other short term investments you have to go to the bank or broker and pull the money out. This process will add at least a day or two until you have access to your cash.

I know what you are thinking, with interest rates so low you think you should be investing your emergency fund to earn some decent interest. This is the exact wrong thing to do! You have to remember what the point of the emergency fund is.

Find the best savings account for you. Click here to learn more.

It is designed to get you through tough times financially. It is not designed to allow you to retire. The last thing you should be concerned with is earning a high interest rate on this money. Risk and return are related and you want the least possible risk with your emergency fund money.

If you have to invest some of this money, follow this rule of thumb:

  • Keep $5,000 in cash in a savings account
  • Put the rest in short term bonds

Understand that the money in the bond fund can lose money. Bonds are not risk free and do lose value. But if you must invest, they are your best option. And with interest rates so low, you are probably better just keeping your money in cash.

We use the CIT Bank. Their online savings account, offers one of highest yields in the country, and we know our money is safe and we can get to it relatively easy.

Another great option to look into is Capital One 360. They offer no fee banking and pay competitive interest rates too.

And if you open an account with $250 or more using this link, you will earn a $25 bonus!

Keeping Track Of Your Emergency Fund

One tool I love to use to keep track of my financial accounts (banking, investing, credit cards, etc.) is Personal Capital. It is a free account aggregator (think Mint.com) that pulls all your financial information into one place.

I like it more than Mint.com because it works. With Mint, I would have to re-link my accounts just about every time I logged in. And the second reason, it does an incredible job with my investments by showing me my allocation and the fees I am paying. To, me it is definitely worth a look. Best of all, it is 100% free.

Final Thoughts

Building an emergency fund is critical to your financial well-being. It will help you to avoid going into credit card debt to get by financially. It will also help you to avoid the stress that comes with knowing you can’t pay the important bills to put food on the table and keep a roof over your family’s head.

While the amount you need to completely fund your emergency fund may look overwhelming, know that the process is simple and painless as I pointed out above. As you build yours, focus on just getting to a balance of $500 and then $1,000.

This will keep you motivated to push through and fund the account entirely. And as the size of the account grows, so too will the monthly interest you earn as well.

Heck, just these 8 tips I noted in this post will net you over $4,000 in your emergency fund in one year. This would be on top of what you are saving monthly. And, these are only 8 tips!

You have to build an emergency fund. Not only will it provide the safety net you need should something happen, it also provides for a solid foundation so you can better save for retirement and save in general.

15 thoughts on “7 Steps To Build Your Emergency Fund Even If You Can’t Save”

  1. This is a pretty good list of saving tips and all easy to incorporate. When I debit a purchase my bank rounds up to the next dollar and send that amount to my savings. It is only a few cents here and there but it does add up!

  2. We sold a ton a stuff around the house to help build our emergency fund. It is amazing how much stuff we had in drawers, cabinets and closets that we didn’t need. We sold designer clothes on Ebay, old cell phones on Craigslist, and Textbooks on Amazon. If you are reading this post and want to fund your emergency fund, I encourage you to go sell the items around your house that you don’t need.

  3. Jon,

    We have about a year’s worth of expenses in our emergency fund, but we tend to be pretty cautious people.

    One of the great things we noticed is that “emergencies” seemed to happen much less often when the emergency fund was in place. I guess they didn’t feel like emergencies anymore! An unplanned expense would arise and knowing we had the funds available (if needed) took all of the pressure off. Fortunately we haven’t had to use our emergency funds yet, but they are there as “insurance” if needed!

    Great post and tips.


  4. The truth of what happens when you don’t have an emergency fund is unfortunately what I’m going through now. It started when my wife lost her job and 4 years later and almost every single bad financial move you can make our debt is out of this world. The first step to getting out of it is building an emergency fund which we are currently doing. I love how you talk about making something that seems like a small change, for instance when you speak about going out less it really only factors out to once less a month so you still get to enjoy something that you like but you also get to save money. Great article

  5. Emergency fund is really important especially for those with family of their own. Commitment is needed because you have to reach a certain amount of money for your fund to be sufficient, and later own build retirement fund.

  6. There is a new school of thought that emergency funds should be invested more aggressively, especially with interest rates from banks currently so low, and especially if you are keeping $12,000 to $24,000 in emergency funds. . By more aggressively, that could mean investing in dividend paying stocks. Many large company stocks have yields ranging from 1.3% to over 3%, including Coca-Cola, Apple, Disney, Starbucks, Kraft, Microsoft, Intel, Wal-Mart, and McDonald’s.

    Yes, there is a chance that the market can crash, just when you need the funds, but there is a much greater chance that that won’t happen, allowing you to make far more money on your emergency savings, especially if you reinvest the dividends. Even if you need the money when the stock market is down, you won’t need to liquidate your account all at once. Plus, the stocks are still very liquid.

    All of the above mentioned stocks are available commission-free at Loyal3, and the minimum investment is only $10. An automatic monthly investment program can be set up, too. More info is available here:

    Two things to keep in mind:
    First, keep your emergency funds in a totally separate account from your regular investing account.
    Second, it’s still a good idea to keep a couple thousand dollars of your emergency funds in a bank account, for same day emergencies.

  7. In 2016, I am aiming to save half my income to save more and to build a more stable emergency fund. I believe following these tips would help me be financially stable. Thanks Jon.

  8. Why don’t they teach this stuff in school? I’ll never use formulas like ab/5=220 but I would have really benefited from knowing this stuff before starting out.

  9. Saving our first $1000 and not using UNcle VISA any more for emergencies was a crucial first step. You can’t dig your way out of a hole so we had to ge the credit cards under control and this was the first step. Four years later all of our debts were paid off, including our mortgage. When you have no mortgage, that 6 month emergency fund becomes almost two years!

  10. That half of Americans would have to go into debt to cover a few hundred dollars of unexpected expenses shows how important emergency funds are, and how under-prepared most people are. Covering this one financial point can put many families way ahead of where they are (and ahead of most American families)!

  11. I have about 6 months worth of bills in my emergency fund in case anything happens, and now I’m working on paying off my student loans while I’m in school.

  12. I swear by number 8 – increase income or create multiple streams of income. It makes it easier to build your emergency fund.

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