How to build an emergency fund: A step-by-step guide

An emergency fund, also known as an emergency reserve or rainy day fund, is an essential part of any solid financial plan. 

A sudden loss of income due to injury, illness, accident or unemployment can result in significant financial strain if you don’t have any liquid savings available to help you through the transition period. 

To build an emergency fund of your own, use these tips and strategies to help you get started and stay motivated along the way.

Why Have An Emergency Fund?

The question of how to start an emergency fund is one that's asked by a lot of people. 

It's important because you never know when something might happen in your life and you'll be forced to deal with it right away. 

In order to get ahead of the curve, take some time out and figure out the steps you need to take in order for this plan of yours to come into fruition.

First thing's first - what will your emergency fund be used for? This is a question that isn't necessarily easy, but it needs answering before anything else can go on.

Where Should My Money Go First When Building An Emergency Fund?

Now that you've created a budget, it's time to start building your emergency fund. Where should you start? 

If you want a breakdown of the order in which most people recommend saving, here are some guidelines: 

1) pay off high interest debt, 

2) create and maintain a 3-12 month or emergency fund, 

3) save for retirement, 

4) contribute to your company 401k or similar plan, 

5) put money into education savings plans for yourself or children. 

Learn more about all of these steps by reading below!

What Can I Do If My Life Is Falling Apart And The Bank Account Is Empty?

1. Take a deep breath and think clearly about what happened, the sequence of events and when it all started. 

2. Make a list of all your expenses, including recurring monthly payments such as rent, mortgage, car payment etc. 

3. Make a list of all your income sources - this can be from wages or other sources such as dividends from investments or rental properties if you have them.  

4. If your expenses are greater than your income, start with the expense that is taking up the most space in your budget (e.g., if rent is $900 per month and you only make $1500 per month then work on lowering the rent).

Step By Step Guide To Building An Emergency Fund

1. Determine how much you need for your emergency fund. 

For most experts, it's six months' worth of living expenses (or 3 months of living expenses if you have a fully paid off home). 

The amount may depend on your profession and the risks associated with that profession, but this is a good starting point. 

So, if you make $5,000 every month after taxes and you want a six-month buffer, you'll need $60,000 in savings.
 

2. Figure out what type of account will work best for your needs.

 Do you want easy access to the money or would you rather not touch it? Do you like higher interest rates or are safety more important? What are your investment goals? 

Once you've considered these questions, choose a type of account:

-Online high-yield bank accounts offer some of the highest interest rates available; however, they can't be accessed without going through rigorous identity verification processes. 

These accounts are great for those who don't plan on touching their emergency fund at all.

 -CDs typically offer competitive interest rates and require little maintenance but cannot be accessed until maturity dates arrive. 

These accounts are best for those who don't mind waiting a few years before accessing their money.

Conclusion

Developing an emergency fund is one of the most important things you can do in your financial life. 

It doesn't matter how much money you have, or what kind of job you have, or where you live. You should always have an emergency fund - and it should be a priority. 

To help ensure that your emergency fund is robust enough to handle any situation, we recommend putting away three months' worth of living expenses every year. 

That means if your family needs $2,000 per month to live comfortably, then you need to save $6,000 each year. 

If this seems like a lot, just think about how much peace it will bring knowing that whatever happens, your family will be okay for at least three months without earning any income.