How to Create an Emergency Fund

Everyone experiences financial emergencies from time to time. You may even have had some recently. It might be a fender bender or an ER visit. An appliance might break down. Whatever the cause, you wind up with an expense you didn't budget for.

What happens next depends a lot on whether you have an emergency fund. If you don't, you'll probably have to scramble to come up with the extra cash. You might have to look into loans or credit cards, and that can lead to a debt cycle that could cause you to consider debt settlement down the road.

When you have emergency savings, it's a lot less stressful. If you have, say, a $500 expense to pay for, you just take $500 out of your emergency savings to cover the bill. Then, you rebuild your emergency fund over the next several months.

If you don't have an emergency fund yet, that's OK. A lot of people don't. It's never too late to start building one. Here's how to get started without straining your budget too much.

What Is an Emergency Fund and Why Do You Need One?

An emergency fund is money you keep on hand to cover unplanned expenses or living expenses during financial hardships, like a job loss. This is different from regular savings you might set aside for a specific goal like a vacation, a new home or car, or retirement. Emergency savings aren't intended to go toward a particular bill. They're designed to cover expenses you can't budget for otherwise, so you don't wind up in a situation where you need to fall back on debt relief programs.

If you've ever experienced debt due to unexpected bills, you can probably imagine how much easier that situation would have been if you'd had $1,000 or even $500 stashed away to cover emergency expenses. Everyone encounters these unplanned costs here and there, and you can make your next emergency a little less stressful by saving for it right now.

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How to Create an Emergency Fund Using Round-Up Savings Apps

Round-up savings apps are a relatively new financial tool. They’re designed to make it easier and more enjoyable to save money. They connect to your bank accounts and monitor your transactions. Whenever you make a purchase, round-up apps automatically round the purchase amount up to the nearest dollar. The app then moves the difference to a designated account.

If you order a pizza with your credit card for $9.50, the app rounds that up to $10.00 and transfers $0.50 from your checking account to your goal account. You can then use all of the goal account money you accumulate to create your emergency fund. 

You're always free to adjust how much you round up—or whether you use the round-up savings feature at all—so you stay in control. If you're going through a hard time and you need to pause it for a little bit to free up some room in your budget, you can do that. You can resume saving when your life gets back to normal.

The big advantage to this type of app is that it automates your savings so you don't have to manually transfer the funds yourself. This makes sticking to your savings goal much easier than if you had to calculate the round-up yourself, then go into your bank account to arrange the transfer.

Best round-up savings apps

Chime is a popular fintech that partners with banks to offer a savings account with a round-up feature. You will need to open a Chime checking account in order to do this. These accounts are free and have no minimum balance requirements. 

After you opt-in to round-ups, every time you spend with the Chime Visa® Debit Card that comes with your checking account, it will automatically round your purchase to the nearest dollar. Chime will automatically move that change to your savings account, so you don't need to make any manual transfers on your own. 

Qapital is another option. It's a finance app that lets you save and invest your money, though you don't have to invest if you don't want to. Its round-up feature works similarly to Chime's, except you have the option to round up to the nearest $2 or $3 if you want to supercharge your savings. So, for example, if you make a purchase that's $8.99, instead of rounding up to $9, it would round up to $10. 

You can do a free trial of Qapital for 30 days. After that, you'll pay a small monthly fee. If you're thinking about giving it a try, make sure the amount you save each month is more than the amount you're paying to own the account. If not, Chime might be a better fit for you. 

How Much Should You Save in an Emergency Fund?

The most common rule of thumb for emergency savings is to keep three to six months' of living expenses on hand. But how you define this is somewhat up to you. You could include only the essentials—your rent or mortgage payment, groceries, utilities, and so on—or you could add in nice-to-haves, like streaming services or money for morning coffees at your favorite coffee shop.

Leaving discretionary items out makes it easier to reach your emergency savings goal. But it also means that you may have to cancel your streaming services and avoid buying coffees if you lose your job and only have enough savings to cover the basics. 

If saving three months of living expenses sounds intimidating, it's fine to set yourself a smaller goal, like saving $500 or $1,000 to start. This amount is often enough to cover many small emergencies.

This is a smart strategy for those who are already juggling high-interest debt, like credit card debt. Saving $500 to $1,000 in an emergency fund could help you avoid taking on new debt the next time an emergency comes up. 

Once you've got that, you can work on paying back your debt on your own or with the help of a debt settlement company. And when that's done, you can work toward that three to six months of living expenses.

What is the 3-6-9 rule for emergency funds?

The 3-6-9 rule is a rule of thumb people use to determine how much they should save in their emergency funds. It breaks down like this:

• 3 months of savings: This is a good target if you're a sole earner with a steady income and no dependents. 

• 6 months of savings: Married couples with dependents where both partners have steady jobs may prefer to save six months of living expenses.

• 9 months of savings: Aim for nine months if you're the sole breadwinner in your family or if you have an irregular income (like freelancing).

Where to Keep Your Emergency Fund

You want your emergency money somewhere close at hand where you can access it quickly. A high-yield savings account is your best option. These accounts are available through online banks and tend to offer higher interest rates and fewer fees. Traditional savings accounts from banks and credit unions can work too.

You could also try a money market account, which is like a hybrid of a checking and savings account, or even a prepaid debit card that you can load money onto as needed. 

It's generally not advisable to keep your emergency funds in cash. It can be easy to lose track of the bills and they're more easily stolen that way too. 

You also want to avoid investing your emergency fund. You might need your emergency savings at a moment's notice. If they're invested and your investments happen to be down at the time, you might have to take a loss to get the cash you need.

If you don't want your emergency fund mingling with your regular savings, then consider opening a designated account for your emergency fund. If you don't want to do that, then keep careful track of how much of your savings is for emergencies so you don't accidentally spend it on something else.

How to Create an Emergency Fund Even Faster

Try one or more of the following to reach your savings target even faster:

• Save a designated amount each month or pay period: If you have extra cash to spare, decide on a dollar amount you want to contribute each month or pay period. Your bank account may enable you to automate a transfer to a savings account on a schedule you choose.

• Save your tax refund: If you expect a tax refund this year, consider putting some or all of this money in your emergency fund. Refunds can be several thousand dollars for some people, so this is a great way to build your emergency fund quickly.

• Save year-end bonuses: If your employer gives you a year-end bonus, you can funnel a chunk of this money into your emergency fund.

• Save birthday and holiday money: If you get cash for your birthday or a holiday, put some of that money in your emergency fund, too. If you get a gift card you can use in place of cash, place a chunk of cash equal to the value of the gift card into your emergency fund.

• Work on paying off debt: Eliminating some debt payments can free up more cash for savings. If you're struggling with debt, consider working with a debt relief program to get out from under it.

• Cut back other expenses: Review your budget to see if you can cut back on discretionary items, like unused streaming services or dining out. Put the money you save into your emergency fund.

• Start a side hustle: Pick up a side hustle in your spare time and put the money you earn from that side hustle into your emergency fund. Keep in mind that you may have to set aside some of your side hustle income for taxes.

Keep an eye out for even more opportunities to save. Any time you come into unexpected money that you don't need to spend immediately, consider earmarking part of it for your emergency fund.

Emergency Fund Mistakes to Avoid

If you want your emergency fund to be an asset to you in a crisis, you have to avoid the following mistakes:

• Using your emergency fund for non-emergencies: This could leave you unprepared when an actual emergency arises.

• Not replenishing your emergency fund after each use: When you take money out of your emergency fund to cover an unplanned cost, you must replenish your emergency fund over the next several months so you're prepared for the next emergency.

• Keeping funds in your checking account: You may accidentally spend your emergency savings on other things if you do this. Plus, you'll also miss out on a chance to earn interest on your money.

• Setting unrealistic initial goals: If you set an initial goal that feels impossible, you might become frustrated and give up. Set small, achievable goals and celebrate the milestones you hit along the way.

• Stopping contributions once you meet your initial goal: Unless you're working on debt repayment, you don't want to stop building your emergency fund once you've hit your first, small goal. Keep going until you reach three to six months of living expenses.

• Not adjusting your savings target as your life changes: Life events like marriages, divorces, births, deaths, and job changes can affect how much you need in your emergency fund. Be sure to reevaluate your emergency savings target at least once per year and whenever you experience a major life change.

Creating an Emergency Fund Takes Time and Consistency

Every cent you put away in your emergency fund leaves you more prepared for future financial emergencies. Once you have a goal amount in mind, keep working toward it using the strategies outlined above. Check your progress every month or two to keep yourself motivated, and see if you can identify opportunities to save even more.

*We have linked to a few apps and other companies in this post. These aren't recommendations, and we receive no money for mentioning their names. We link to bring you quick access to resources we think you might want to look into.