How to Start an Emergency Fund as an Adult

Here’s a crazy (bad) stat: 4 in 10 Americans are unable to cover unexpected expenses in a time of crisis. Unfortunately, few countries do any better.

The reason why this is bad can be summed up in two words: things happen. Life can be full of unpleasant surprises. Surprises like coming home one day to find that your roof is leaking or that your job no longer exists.

Fortunately, a full-proof solution exists for taking the sting out of these situations: an emergency fund.

How to start an emergency fund

Aim to save 3 to 6 months’ expenses

According to most financial advisers, an emergency fund should cover at least 3 to 6 months of living expenses (NOT income), depending on your circumstances.

If your income varies or is uncertain (for example, if you’re a freelancer), you may want to opt for a larger emergency fund (9 to 12 months of living expenses).

Living expenses include things like rent or mortgage payments, household bills, food, transport, etc. Basically, anything you need to survive — so no restaurant trips or Netflix. For example, if you need to spend $2,000 a month to cover necessities, you should have at least $6,000 in your emergency fund.

Tip: Take Charge America has a monthly/yearly expenses calculator.

Don’t focus on debt repayment at the expense of an emergency fund

While there is plenty of conflicting advice out there as to whether it’s best to pay off your debt first or build an emergency fund, in general, experts recommend doing both, especially if you don’t yet have an emergency budget.

Although it may be tempting to pay off your debt(s) as quickly as possible, doing so without an emergency fund in place means that if an emergency — whether that’s a medical bill, a car repair, or something else entirely — does occur, you’ll probably need to borrow again, increasing your debt burden.

Instead, a solid strategy is to focus on paying off high-interest debts + making minimum debt payments while at the same time putting aside at least a small amount — even $10 or $20 each month — for your emergency fund until you have $1,000 or more in savings. Slowly build on that until you have a solid savings cushion to fall back on.

Review your income and lifestyle

Apart from debt, people usually find it difficult to save because:

1. Their salary is too small, or
2. Their spending is too high.

If your salary is relatively small, see if you can make extra money from a side hustle or make yourself more employable and get a better-paying job (if possible).

If you go with the latter option, make sure to avoid “lifestyle inflation.” To quote George S. Clason’s classic “The Richest Man in Babylon,” “what each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.”

If your spending is too high, take a closer look at your expenses. What are you spending your money on? Is there anything, like alcohol, cigarettes, takeout coffee, junk food, etc., that you can cut out?

Tip: Side Hustle Nation has a list of 100+ side hustle ideas to make $500 in your spare time.

Set monthly savings goals

Whether that’s 15% of your pay a month or $50 a week, decide on how much you’ll be setting aside each month for your emergency fund.

Tip: Need to make a budget fast? Bankrate has a home budget calculator.

Get a savings account

That way, you can access your savings whenever you need them. Ideally, you want to get a savings account with a high-interest rate — just make sure that it’s separate from the account you already use so you’re not tempted to dip into your savings for fun things.

Even better, go for a high-yield savings account, which works pretty much the same as a normal savings account but has a much higher interest rate.

The last thing you want to do is invest your emergency fund. Imagine having to worry about selling your stocks while also thinking about car repairs. Not fun.

Tip: Investopedia has a list of the best high-yield savings accounts.

Other tips

• Don’t compare your financial journey to that of others, a.k.a. don’t read other people’s money diaries (at least for the time being). While you can learn quite a bit from how others handle their finances, it can also lead to insecurities, envy, and depression — feelings that may stop you from starting your emergency fund in the first place.
• Set up a direct debit or standing order to transfer money directly into your emergency fund.
• Always replace whatever comes out of your emergency fund and never use it unnecessarily.
• If you suddenly come into money, whether through tax refunds, pay bonuses, cash gifts, or inheritance, put at least some of this extra cash in your emergency fund.
• Need to get through an emergency without an emergency fund? TIME NextAdvisor has some tips.
• Smart About Money has a free, detailed course on how to set up an emergency fund. In particular, it notes that if you’re ever in a bad situation financially, you can call 2–1–1 from anywhere in North America to get advice on things like disaster and emergency help, housing and food assistance, employment and education opportunities, and more.