Building an emergency fund is essential to your financial stability as well as your overall financial health and wellness
Want to improve your financial life? Then believe me when I say that the number one smart money tip is to build your emergency fund.
Now, I could say something else is priority #1. Things like budgeting, fixing (or eliminating) your credit, buying a home, or saving for retirement are all great smart money tips too.
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Yes, those things are important. However, imagine we’re in an alternate universe where I am only able to make one single suggestion. After giving my single smart money tip, I then would be forever silenced. I’d never again be able to offer any financial education, coaching, or counseling ever again.
In that (unlikely) scenario, my suggestion would be this: Build an emergency fund.
Like, yesterday.
Keep reading for smart money-saving tips to build your emergency fund and stabilize your financial life.
Smart Money Saving Tip: Take a Savings Challenge
FREE SAVINGS CHALLENGE DOWNLOAD
You can build your emergency fund! Ready to kickstart your savings goals? Get started by taking a savings challenge! Turning things into a competition (even if it’s just with myself) is an instant motivator. This challenge will get you focused and on track to meet your savings goals. Get your savings challenge printable when you download your FREE Budget Planner Bundle HERE.
The Power of an Emergency Fund
Emergency fund = Financial Freedom Foundation
I’m passionate about the power of building an emergency fund. This tool, having a barrier between my plans and real life, made all the difference. My family paid off over $60,000 in debt years ago. Because of our emergency fund we have not used a credit card or taken out a loan since well before 2017. Budgeting, cash flow planning, and getting on the same page as my husband were also very important. I can pick one smart money tip that I believe made us successful. Aside from the grace of God, it would be building our emergency fund.
No Savings = 😕
In the early days of our marriage, my husband and I did not have a dollar to our names. I don’t mean that figuratively. We literally had no savings or money to our name. Every penny we made at our low-paying jobs was instantly sent to pay our bills. Anything left was used to buy food for the week and gas for our cars. A couple of years and a handful of credit cards later, my husband and I finally had our ‘come to Jesus’ moment when it came to our money. Before we got on the same page and agreed to build an emergency fund and live a debt-free life, I had been desperately trying to figure out how to fix our financial situation for quite some time. He, however, wanted nothing to do with it.
Getting on the same page
Finally, after lots of arguments and tears, we decided it was time to do something different. Up until that time, we had been using credit cards as our buffer. Something broke? Credit card. A kid needs new shoes? Credit card (I mean points am I right?) Christmas. Credit card. You get the picture. Our life was like a high-stakes game of Tetris. The pieces speeding down the screen were our various cards, accounts, and modest paychecks that I attempted to juggle month after month. We still had no real savings because we lived in a cycle of spend-earn-pay. There was no room to add save to that equation.
Why you need an emergency fund
More debt more problems
Finally, my husband and I agreed to work together to change our finances and build our emergency fund. Up until that pivotal night, neither of us had ever really had any real savings to our name. At the time I worked in a Bank. I don’t know if you know this but banks make their money by people being and remaining in debt. A bank’s ‘smart’ money-saving tip typically consists of financing anything and everything you can. The bank’s ‘strategy’ is to get ‘points’ and build your credit, allowing you to take on even more debt.
Debt is not a defense
I was surrounded by a culture where people worshiped at the altar the almighty interest rate (and not the kind you earn). In my years of working there, I rarely heard anyone talk about saving money. It was also common practice to encourage customers to sign up for lines of credit to link to their bank account in case their funds ran low in an emergency (i.e. what should be an emergency fund savings account). Conversations with my fellow bankers were all about how much commission we’d get if we made a new loan referral that was approved, what cards were currently offering 0% introductory interest rates, and how someone’s new 60-month 3% APR car loan was ‘such a great deal’.
I hope you can hear the sarcasm dripping from my voice.
A smart money plan for when things go wrong
Finally, I figured out the answer that I had been looking for. Yes, we needed to work together to make sure we were not spending more than we made. However, equally if not more important than that, we needed to have a plan for how we’d cover the cost of REAL life getting in the way of our plans. We needed something that would stop us from getting into more debt when our plans didn’t work out.
We needed an emergency fund!
Your Smart Money Superpower
Your emergency fund is the secret sauce or superpower to improve your financial health and wellness. This powerful tool, when used correctly, allows you to quickly get back on track when life throws you off course. When you use credit cards or lines of credit as your emergency fund, two bad things happen. First, there is whatever emergency came up. Second, is the fact that you’re now in debt and likely faced with paying interest.
What is an Emergency Fund
An emergency fund is NOT just your savings account
Before I tell you how to build an emergency fund, we first need to clarify what an emergency fund is. Now, I’m not sure how I misunderstood this given my educational background, conservative upbringing, and years of working in the financial industry, but I had always thought that your emergency fund and your savings account were the same thing.
An emergency fund is a separate account
While you may put your emergency fund in a savings account the act of ‘saving’ is not its function. An emergency fund is a fixed amount of money that is set aside for, you guessed it, emergencies. It’s not the same as the money you set aside to save for your future and build up month after month.
As a side note, something that often comes up when discussing the importance of emergency funds is that when you’re living paycheck to paycheck, building up an emergency fund is virtually impossible. After all, if somewhere between 75 and 80% of Americans are living paycheck to paycheck and only 20% report having more than $5000 in savings according to a 2023 year-end survey this does seem like an unlikely possibility. I’ll be sharing 5 smart money-saving tips that will show you exactly how to build an emergency fund, even if you’re living paycheck to paycheck.
An emergency fund has a fixed target balance
An emergency fund should remain unchanging and untouched until the day comes when you have an unplanned or unexpected event that a.) requires immediate resolution and b.) does not fit within your existing budget and cash flow plan. After I use my emergency fund, I need to rebuild it to its previously established value. Then I leave it alone again until the next time an emergency arises.
A savings account is where you continually save for your PLANNED future
A savings account, on the other hand, is a place where you send a portion of your income to prepare for the future you are expecting and/or planning for. For example, you save for a new car, a new home, or a vacation, Christmas, birthdays, graduations, retirement, a garage addition, babies, etc. None of these things are emergencies. I need to plan, and save, for these upcoming events.
Keep your emergency fund and planned future savings separate
Again, an emergency fund is for unexpected and unplanned emergencies whereas savings is for your planned future. It’s very important to keep these two things separate.
Realizing that we needed a buffer in place that was NOT a credit card to put needed space in between our plans and the ups and downs of real life, a clear vision was formulated. I knew our mission. Before we even thought about our other financial goals like paying off debt and saving money for the future we envisioned, we needed to establish an emergency fund.
How to Build an Emergency Fund
Step 1: Setting your emergency fund savings goal
My target emergency fund savings goal is based on what my minimum monthly survival expenses amount to. Monthly survival expenses are the expenses I have to pay, no matter what, even if I face an emergency like injury or job loss. Take your monthly survival expenses times 3 or 6, depending on your situation) to get the total target balance of your emergency fund.
I have created a handy emergency fund calculator PDF guide that helps you calculate what your emergency fund should be based on your unique situation. You can access the guide (along with the savings tracker) for FREE when you download my free budget planner template bundle.
Step 2: Use Smart Money-Saving Tips to Achieve Your Goal
Use a Separate Account
Once you’ve established your target emergency fund value, the number one smart money-saving tip is to keep the money you are saving for your emergency fund in a separate account. This can be a separate savings account or money market account. The point is, separate your emergency fund from your regular savings or spending accounts. Don’t let the funds you’re saving for emergencies mix with other money. In addition, you don’t want to continually build your emergency fund once it has been established.
Make your goal SMART
To make your emergency fund goals ‘SMART’ we need to give the goal a deadline as well as an actionable breakdown of when and how much you will save. Once you have calculated your total target emergency fund value, take it a step further by mapping out how long it will take you to achieve your goal by dividing the total target value by the amount you can realistically deposit into the account each week/month. Alternatively, you can divide your target emergency fund value by the number of weeks or months you’d like to achieve your goal in. This will give you a clear breakdown of how much money you need to save and when.
Find (and eliminate) your budget buster
Chances are, there are two or three expenses that you repeatedly spend more than you plan on. For my family, it’s usually food and fishing gear (that second one I can’t take responsibility for). A great money-saving tip is to first figure out what it is that you’re repeatedly overspending on (if you don’t know your budget buster(s) already). Next, make it your mission to get laser-focused and creative on reducing that individual expense.
For example, say you, like my family, easily overspend on food. Instead of cutting out smaller less impactful expenses, if we commit to cutting our food budget in half for a few months we would be able to meet our savings goal much faster than by say simply cutting out Netflix. My smart money-saving tip is to find that thing that you’re currently overspending on and do something different, at least for a period of time. Making one intentional change could potentially save you hundreds of dollars per month that can be applied to your emergency fund savings goal.
Automate with a cash flow system
One of the most important smart money tips is to automate wherever possible. When things are automated, we don’t have to think about it. This reduces friction and allows for more consistent, successful results. One of the best ways to automate your emergency fund savings is to use a cash flow system. Using a cash flow system involves establishing predetermined percentages for where you’re money needs to go as soon as it is received.
Part of building your cash flow system involves predetermining what percentage of your base income you can apply to your goals. The best way I can tell you how to build your emergency fund is to make that your single financial goal until it is complete. Therefore, every time you get paid, you will automatically send a predetermined percentage of your income to your emergency fund. Learn more about getting started with a cash flow system HERE.
Clarify how you can have more with less
I will not go into too much detail about the science behind how having less clutter and excess impacts our money (and happiness) habits here. However, a great money-saving tip is to simply commit to having less, at least for a season. I am not suggesting that you become full-on minimalists in an effort to build your emergency fund.
However, decluttering both your physical and financial life can have a massive impact on your ability to reach financial goals (such as building your emergency fund) as well as your overall happiness and well-being. To get started on clarifying what ‘less is more’ looks like for you, I recommend starting by clarifying your vision for your ideal future, your core life values, and your priorities.
Focus on one goal at a time: Build your emergency fund
While this may have been alluded to in the previous smart money-saving tips, it’s worth clarifying that focusing on one goal at a time is essential to successfully build your emergency fund. There is power in focusing on one goal at a time and financial goals are not excluded from this. When you’re on a mission to establish an emergency fund to stabilize your life and finances, that should be the only financial goal you work on.
While you’re building your emergency fund, you don’t make extra debt payments, save for other goals, fund retirement, etc. When you’re laser-focused on one goal at a time, you’ll make more progress because you’ll see immediate results. That doesn’t mean that you’ll never work on those other goals. You’re just going to prioritize all of your goals and work on checking off one thing at a time.
Smart Money’s Next Steps
Having an established emergency fund is foundational to financial health, wellness, and your ability to achieve other financial and life goals. You now know how to build an emergency fund and can apply smart money-saving tips to achieve your goal. Whether you want to live a debt-free life, have more financial stability, freedom, or flexibility to do things like travel, or be more generous with your time and/or money, having an established emergency fund is the smart money superpower that will make all of your other financial and life goals possible.
FREE Emergency Fund Guide, Savings Challenge, and PDF Tracker
Now that you know how to build your emergency fund, go ahead and download your FREE budget planner template bundle. This free planner includes your emergency fund builder guide as well as a goal tracker and savings challenge PDF. Get the free PDF planner HERE!
Happy saving!
References
https://www.cnbc.com/2024/01/24/how-much-money-americans-have-in-savings.html#:~:text=About%2029%25%20of%20respondents%20have,Americans%20have%20%245%2C001%20or%20more.
https://www.forbes.com/advisor/banking/living-paycheck-to-paycheck-statistics-2024/#:~:text=A%202023%20survey%20conducted%20by,increase%20from%20the%20previous%20year.
