How to Build an Emergency Fund in 6 Easy Steps

Exactly how to build an emergency fund in six easy steps.An emergency fund is like your own personal safety net. It’s money that’s there when you need it without having to jump through hoops, wait for outside approval, or pay interest.

(Which reminds me, the idea that it’s smart to get a credit card for emergencies is nuts if you ask me. Get money for that instead. Much better than going into debt when you’re stressed out already! Or anytime really.)

An emergency fund gives you peace of mind when it’s not being used, and it can save your rear when you do need to use it. So how do you build one, especially with all the other pre-existing claims you’ve got on your money?

Here’s how to do so in six easy steps.

1. Commit to doing so.

Don’t let the words, “I know it’s important, but…” pass your lips. Building an emergency fund IS important, so make it a priority. You can save SOMETHING every time you get paid. First, before you do anything else with your money. I know it can be hard, but it IS possible. Commit to it.

2. Define an emergency.

Decide what types of thing will constitute an emergency, and put those things in writing. This is important, because otherwise things like “pizza” can become an emergency. (Or maybe that was just my life…) Get exactly what you’re going to consider an emergency defined right now. Before anything happens.

My emergency fund is only for two types of things: being out of work and for if someone is bleeding and needs an unexpected trip to the hospital. Your emergency fund can cover whatever you’d like.

Keep in mind that the more things it’ll cover, the bigger your fund will need to be. Having a clear, written decision about what it will be used for is critical. Otherwise you’ll be tempted to use it for every little thing, and it will quickly dwindle to nothing. (You WILL use it eventually, because everyone has emergencies. Just use it for exactly what it’s meant for and nothing else.)

3. Set an initial target amount for your fund.

This should be an amount you feel you’ll be able reach fairly quickly, say within a month or two. It could be $100, $500, $1000, or some other initial amount. Just make the amount something that feels doable to you instead of overwhelming. Then challenge yourself to reach that number as soon as possible.

Don’t try to save up an entire year’s worth of expenses or something off the bat. (Although you can certainly do that later if you like!) The important thing right now is to get SOME money saved up. Money that you will ONLY use for the emergencies you put in writing, no matter what. You can always add to it later.

4. Find a way to reach that first target amount quickly.

There are a few different ways to go about hitting your target as soon as possible. For example, you might decide to reduce expenses, increase income by doing odd jobs or selling things, or both. Or maybe you’ll decide to save any change you have at the end of every day, to add a percentage of each dollar earned to the fund, or something else. Get fast & furious about it.

5. Open an account for your emergency fund.

Your emergency fund needs a place to life, so open up an account and put the first bit of money in it. I have an online savings account for mine at Capital One 360. (Using that link to sign up could get each of us a small bonus.) Digit is another great place to painlessly open an account and start funding it. It takes just a few minutes to open and connects to your checking account. (See this post for my review of it. I definitely recommend it.)

6. Keep going.

Keep adding money to your fund until you reach that first target amount. Then set a new, slightly larger target and continue on until you reach that. Continue on until your reach your final target. Most people set that as several month’s worth of expenses. (Not income.) Mine is set at 12 month’s worth of expenses. Keep in mind that there probably will be setbacks and tests. Keep going despite those, and you WILL get there. And if you have to use it? Congratulate yourself on being prepared, then rebuild the same way you built it the first time. Using an emergency fund is actually progress, because it means you didn’t use debt :)

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