How to Build an Emergency Fund

Life is stressful and likes to test us—and one way it tends to do that is through unexpected emergencies. When something unexpected happens out of the blue, it’s scary—and can be even scarier when it’s going to cost a lot of coin. The way to avoiding that? Starting an emergency fund. Car troubles, medical mishaps, and travel blunders can all be a little bit less scary when you have an emergency fund at the ready.

Of course, I’d rather my hard-earned money not go to fixing engines or covering copays, but having one at the ready does give you a little extra peace of mind when the going gets tough. Before your next batch of urgent expenses arise, consider following these steps towards building a healthy emergency fund.


Step 1: Outline potential emergencies

Before you start moving money around, you may want to play a not-so-fun game called “what will this disaster cost me?” Focus on three potential emergencies that could be expensive for you. For example, my top three emergency concerns relate to my car, my health, and my laptop. Why? My car is 12 years old and is surely due for pricey repairs or a replacement soon, as a freelancer my healthcare coverage has a very high deductible, and a broken laptop means my ability to earn an income will slam to a halt.

Your emergencies may be totally different: a single gal living in NYC across the country from her family may be more concerned about having enough money saved to fly home at a moment’s notice, and chances are, she won’t have car troubles like me! Pick your big three emergency expenses and tally up how much they would all cost combined—this will determine your ideal emergency fund amount.



Step 2: Budget your way to security

Now that you know how much you want to save, it’s time to work towards that number. It’s OK if you don’t have enough money to put in your fund right now—you will appreciate any progress you make towards this fund later, no matter how long it takes. The last thing you want to do is focus too much on building your emergency fund if it will damage other areas of your financial life. For example, if you have high-interest credit card debt weighing you down, you’ll still want to focus on paying that off quickly and shouldn’t let your emergency fund completely get in the way. Carving out room in your monthly budget to help build your fund is a slow and steady way to make healthy progress.


Step 3: Embrace direct deposits and windfalls

With bills, vacations, holidays, and all the other expenses life throws at you, it will be super easy to forget about refreshing your emergency fund. The best way to keep your fund growing is to set up a direct deposit. Have a set amount from your paycheck automatically deposited into your savings so you don’t have to think about it. That way, you’re contributing to your fund each month similar to how you would pay a bill. Once the money is out of sight and out of mind, chances are you won’t be as tempted to spend it.

It’s also a good idea to put any windfalls towards your emergency fund. If you weren’t relying on a bonus, tax refund, promotion, or inheritance to help pay for bills or debt, then consider putting some or (all of it!) towards your emergency fund.



Step 4: Make your money work for you

Here’s the not-so-cool thing to consider about an emergency fund: you really shouldn’t do anything with that money unless you absolutely need to, and that can harm you financially. That seems counterintuitive, but hear me out: yes, it is good to not touch your emergency fund, because then you’ll have the coverage you need in the case of an emergency. But what that discipline also means is that your money isn’t growing. Because you may need that money at a moment’s notice, you can’t invest it. No stocks, mutual funds, CDs, or investment properties—nada. You need your fund to be liquid.

One option you do have for growing money that you need quick and easy access to is to open a high-yield savings account. High-yield savings accounts are often found at digital banks (less overhead means more interest for you!) and have annual percentage yields that are higher than a traditional brick-and-mortar bank. Generally, these accounts are limited to six withdrawals a month, but that shouldn’t be a problem for an emergency fund!


Do you have an emergency fund set up? How did you make it a financial priority?