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A Quick Guide to Your Emergency Fund

If there’s one thing living through 2020 taught us all, it’s that you definitely need an emergency fund. Why? Well, because you never know what’s going to come your way (hello, global pandemic). But even after all of that, 36% of Americans still say they can’t cover a $400 emergency.1

Wouldn’t it feel great to have a buffer between you and the curveballs life throws at you—a safety net that helps you sleep soundly because it turns a major life crisis into just a slight inconvenience? Even if your AC goes out in mid-July, you’re cool as can be. Why? Because your emergency fund has your back!

What Is an Emergency Fund?

An emergency fund is simply money you’ve set aside for life’s unexpected events—sometimes people call it a rainy-day fund. But whatever you want to call it, this emergency savings can take care of whatever life tosses your way.

Now, I’m talking about true emergencies here, like a car accident, a hospital visit or a cracked tooth. A BOGO shoe sale isn’t a good reason to dip into your emergency fund, you guys. This thing should only be used when there’s a real emergency you need cash to cover.

Why Do I Need an Emergency Fund?

The reason to have an emergency fund is simple: You don’t know what’s going to happen. You’ll be so thankful you have that emergency money if you suddenly lose your job or get in a fender bender.

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Don’t let yourself be caught off guard! If you don’t have emergency savings, you’ll be way more tempted to buy into a credit card scheme or loan pitch. Don’t do that. Instead, get this emergency fund squared away. You need that safety net between you and life.

Our State of Personal Finance Study shows that 60% of Americans have dedicated emergency savings or a rainy-day fund. That’s so encouraging to hear. Take a hint from them and get started working on your own emergency savings.

How Much Should I Save for My Emergency Fund? 

Let’s talk about how much to save for an emergency fund. If you have consumer debt, I recommend saving a starter emergency fund of $1,000 first. Then, once you’re out of debt, it’s time to beef up that amount and save three to six months of expenses in a fully funded emergency fund. This is the path we teach in the 7 Baby Steps, which is our proven plan for getting out of debt and building wealth.

If you’re trying to decide how much to save in your fully funded emergency fund, a good rule of thumb is this: The more stable your income and household are, the less you need in your emergency fund.

If you’re part of a two-income household or you’ve had a steady job for several years, then three months of expenses in your emergency fund is probably just fine. But if you’re a one-income family, you’re self-employed, or you earn straight commission, then a six-month emergency fund is better for you since a job loss could make you unable to pay the bills.

You should also aim for a six-month emergency fund if someone in your household has a chronic medical condition that requires frequent visits to the doctor or hospital. Even if there’s room in your monthly budget to pay for the expenses, it’s good to be prepared in case a big emergency hits.

Where Should I Keep My Emergency Fund? 

When you’re trying to figure out where to keep that emergency fund, remember this: Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly. The best options are:

  • A simple savings account connected to your checking account
  • A money market account that comes with a debit card or check-writing privileges
  • An online bank that pays a higher interest rate and where you can still transfer money quickly and directly to your checking account

When you’re trying to decide where to keep your emergency fund, the most important thing is that you can pay that doctor or mechanic quickly and with no headaches.

But make sure you’re not keeping your emergency fund in a place that’s too easy to access. My husband and I keep ours at a completely different bank than our other accounts to make sure we can’t just dip into it whenever we want. And turns out—we’re not alone! Our State of Personal Finance Study found that 63% of people who have an emergency fund keep it separate from their checking and savings accounts.

When Should I Use My Emergency Fund? 

When a sudden expense pops up, it can feel like an emergency—but that might not be true. Here are three questions to ask yourself to see if you need to tap into your emergency savings:

  1. Is it unexpected?
  2. Is it necessary?
  3. Is it urgent?

The more you answer yes, the more likely the situation you’re in is an emergency and justifies using money from your emergency fund. 

How to Build an Emergency Fund 

Building up those emergency savings will give you so much peace of mind. Here’s how to do it:

1. Make a budget and live by it. 

A budget doesn’t tell you what you can’t do—it shows you what you can do. So, list out all your monthly income and any expenses. When you’re making your budget, you’ll be able to see how much money you have available so you can be ready to jump into the next step. My favorite budgeting tool (hands down) is EveryDollar. Not only is it free, but it actually helps you save money the longer you use it. With your EveryDollar budget, you can create funds, track debt, organize your expenses, and more. Download it here and create your budget today!

2. Set a monthly savings goal. 

This is how much you want to set aside each month to continue building up your emergency fund. As a natural spender, I know that taking money from your paycheck and putting it away to save for the future can be really hard. But you’ll be amazed at how quickly your savings can grow if you’re consistent about adding to it! Don’t know how much is the right amount? Go back to step one and work that budget.

3. Adjust how much you save. 

As time goes by, you might be able to save even more! If you or your spouse get a promotion at work, that means you can add more cash to your savings. Be sure to look over your budget for new ways to tighten the purse strings and up the amount you’re saving.

Quick Ways to Start Your Emergency Fund

  • Sell stuff. One of the easiest ways to beef up your emergency fund is to sell some stuff! Go take a look in your garage or dig through your closet. Is there anything you could part with? Selling some items that are collecting dust can add up to major cash in your emergency savings. And every little bit helps! You’d be shocked at how quickly $5 here or $10 there can add up.
  • Boost your income. Let’s not forget about that wonderful four-letter word: work. Take on a part-time job. Start a side business. Look into dog walking in the mornings before your day job or babysitting those cute kids next door every other weekend. It’s little things like this that can really help you stack extra cash fast!
  • Adjust your tax withholdings. Do you get a big tax refund each year? A lot of people use that little windfall to buy new stuff they’ve been eyeing all year, like new furniture or a fun new gadget. And to be fair—some people do put it in their emergency savings. But what they don’t realize is that a tax refund is actually an interest-free loan they’ve let the government hang on to for them all year.

So instead of doing that, adjust your tax withholdings, keep more money in your paycheck, and put more money toward your savings goals, like—you guessed it—an emergency fund.

  • Find even more money. Another great way to find extra cash? Take my 14-Day Money Finder challenge! You might be pleasantly surprised at how much cash you can find when you take a closer look at your lifestyle. The average person ends up finding $2,000 for the year—so go take the challenge and see how much extra cash you can find!

Start Your Emergency Fund Today

Take a second and dream with me. Can you imagine what it would feel like to have no debt payments and have six months’ worth of expenses sitting pretty in your emergency fund?

Seriously, stop and think about what life would feel like. You’d be able to breathe easier with that safety net in place, wouldn’t you? An emergency fund is sort of like insurance—it costs you some money up front, but it covers you when things go bad.

Now that you have that picture in your mind, start putting your emergency fund in place! Get on a budget, pay off your debt, and begin saving. You’ll be amazed at how quickly your emergency fund piles up when you aren’t making debt payments. And the best part? You’ll feel an amazing sense of security.

In fact, if the roof leaks or the washer breaks, don’t be shocked if you end up thinking, Eh, what’s the big emergency anyway? That’s the peace of mind that comes with completing your emergency fund! It turns a crisis into an inconvenience.

By the way, if you don't have a budget yet, download EveryDollar, our free budgeting tool. It's what I use to budget every single month, and I can't talk it up enough. 

Hey, remember that dream—that feeling of the security an emergency fund will give you. Then start making it happen! 

Rachel Cruze

About the author

Rachel Cruze

Rachel Cruze is a #1 New York Times bestselling author, financial expert, and host of The Rachel Cruze Show. Rachel writes and speaks on personal finances, budgeting, investing and money trends. As a co-host of The Ramsey Show, America’s second-largest talk radio show, Rachel reaches 18 million weekly listeners with her personal finance advice. She has appeared on Good Morning America and Fox News and has been featured in publications such as Time, Real Simple and Women’s Health magazines. Through her shows, books, syndicated columns and speaking events, Rachel shares fun, practical ways to take control of your money and create a life you love. Learn More.

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