Create an Emergency Fund That Has Your Back

create an emergency fund

When the country went on lockdown back in March, so many people found themselves in a really tough situation. Half of all U.S. citizens have less than $400 saved, and for those who do have savings, they often only have enough for a month or two. 

Nobody assumes their job will disappear tomorrow, but as we’ve seen this year, anything can happen. 

If you’re one of the millions of Americans who was caught off guard with a sudden loss of income, this is a good opportunity to start setting yourself up with an emergency fund that has your back. (And no, you don’t need to have a ton of extra money lying around to get started.)

How much should be in your emergency fund?

The short answer to this question is 3-6 months of your take-home pay. That number can easily be adapted whether you’re single or you’re the breadwinner for your family. 

To get a more exact number, think about your specific situation. 

  • Are both you and your spouse employed? If you’re in different fields, you’d probably be okay with 3 months of savings. 
  • Could you quickly get another job if you lost yours? Again, you could probably be okay with closer to a 3-month cushion.
  • Are you a business owner? You should have a full 6-9 months saved, especially if your family relies on your income.

On the flip side, there is such a thing as an overfunded emergency account. If you have too much in savings, you’re missing opportunities to invest and grow your money in other ways. You can save up to a years’ worth of emergency money if you want to be really conservative, but beyond that, you could be doing a disservice to your portfolio. 

What if finances are tight?

You don’t need a money windfall to save up a healthy emergency fund. You just need to establish good savings habits and create a plan.

An emergency fund should be a top priority, because without one, many people use credit as their emergency fund. And that’s when problems really begin to compile.

For example, if you have a lot of student debt that you’re paying off, it’s okay to pay less while you build your emergency fund.

The same goes for you if you’re compensating for a loss of income. 

Let’s say you were thinking about building up your emergency fund, but then you lost your job. How do you build up an emergency fund if you’re working with one household income or a reduced income?

The quickest way to save money is to cut unnecessary expenses. Remember, this is a temporary situation. So think critically about what you actually “need,” versus what you’re just used to.

There are also tons of opportunities right now to pick up extra cash from a side hustle. Try brainstorming which skills and resources you could use to bring in extra money if need be. 

Where should you keep your emergency fund?

Your emergency fund is not going to be as exciting as your investments. It’s there to cover you in an emergency. So don’t expect to keep it somewhere where it’ll earn tons of money over time.

You want your emergency fund to be easy to access and protected from market volatility, so a good old fashioned savings account is a fine place to keep it. Look into online high-yield savings accounts for higher interest rates if you want to maximize your savings.

When should you use your emergency fund?

If you’ve been working hard to build up a healthy cushion for emergencies, it can be hard to actually use it when you need to.

Did you lose your job or need a car or house repair? That’s what the emergency fund is there for; unexpected costs you never saw coming. 

Other investments – like installing a pool, taking a last-minute trip or house upgrades – don’t count as emergencies. Set up separate savings accounts for those purchases. 

Just remember that once you take money out of your emergency fund, you should prioritize putting it back in as quickly as possible. 

It may not be fun or exciting, but you’ll be so relieved to have that money there when you need it.

About Your Richest Life

At Your Richest Life, Katie Brewer, CFP® works with busy professionals to help them organize their financial life and make progress on their goals. For more information on the services offered, contact Katie today.

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