4 Steps to Build an Emergency Fund

One of the greatest feelings is safety — including feeling safe in your current financial situation.

An emergency fund is your financial security blanket. It protects you from unexpected costs like car or home repairs, medical emergencies, economic downturns, or job loss. An emergency fund is there for you in your darkest (financial) times.

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Step 1: Calculate How Much You Need in Your Emergency Fund

The general recommendation is that your emergency fund should cover three to six months' worth of expenses. However, saving up that much money will take time — and to some may feel like climbing a mountain.

While three to six months of savings is ideal, don’t beat yourself up if you feel like saving that much is equal to summiting the top of Everest. Take baby steps to create an emergency savings that you feel comfortable with. 

Start with one month of expenses, then take your time working up to two months, and so on. After all, some saved is better than none! 

To figure out how much you need in a month, add up all of your monthly expenses: things like your housing, bills, groceries, gas, and any minimum debt payments. 

Don’t focus on saving up your entire income — instead, look at just how much you need to cover expenses in case you lose your income. 

READ MORE: How Much Should I Put In My Emergency Fund Per Month?

Step 2: Set Up The Right Type Of Account

The best place to house your emergency fund is an account that bears interest, like a high-yield savings account. 

HYSAs pay higher-than-average interest rates, while also remaining fairly liquid, giving you easy and quick access to your money when you need it. 

HYSAs also have little to no fees, meaning they are a free way to stash your emergency funds. For example, the SoFi Checking and Savings Account earns up to 4.00% APY with no monthly fees or minimum balance required.

Your money is also secure since HYSAs are federally insured through the FDIC (Federal Deposit Insurance Corporation) via most reputable banks. 

But the best part of parking your emergency fund in high-yield savings is that you can earn free money!

For example, if you saved up $10,000 and placed it into an HYSA that paid an APY (annual percentage yield) of 4.20%, you would earn roughly $420 a year in interest. 

READ MORE: 5 Types of Savings Accounts to Help You Reach Your Savings Goals

Step 3: Determine Your Monthly Deposits

After you’ve calculated how much you need to cover your monthly expenses, the next step is to figure out how you will achieve your savings goals. 

The first thing you will do is set a budget. Creating a budget will help you understand what you can save each month after you’ve covered your other expenses.

If you’re stuck on the concept of budgeting, try applying a rule like the 50/30/20 rule, which suggests you budget your take-home pay into three buckets: 

• 50% for needs
• 30% for wants
• 20% for savings, investing, or debt repayment 

Here’s an example of how much you would save by take-home income level using the 50/30/20 rule if you have no debt:

Annual salary after taxes	Monthly take-home pay	20% saved	Total savings in a year
$32,000	$2,667	$533	$6,340
$45,000	$3750	$750	$9,000
$60,000	$5,000	$1,000	$12,000
$75,000	$6,250	$1,250	$15,000
$90,000	$7,500	$1,500	$18,000

Step 4: Find Small Ways to Save

After you set a budget, you’ll want to actively look for ways to help you save. Here are a few tips:

Consider automating your savings via your employer

Your employer may let you split your direct deposit among many accounts. 

You can set a percentage (like 20%, for example) to be deposited into your savings account automatically on payday. You can also set a flat dollar amount if you need to start small. 

Deposit tax refunds, work bonuses, and birthday money

It may be tempting to take that hard-earned bonus or birthday cash and splurge on something you’ve had your eye on. 

But If you find yourself with a sudden cash infusion, pay yourself first and stash it in your savings. This will help you achieve your savings goal faster. 

Cut unnecessary spending

Just $50 to $100 here and there can go a long way. Challenge yourself to a month of no dining out or impulse shopping and save that money you would’ve spent.

Set a goal to increase your savings as your income goes up

When you get a raise at work (or change jobs), make sure to adjust your savings too. If you are used to saving a percentage, this will help. 

Enable round-up features

Many banks, credit unions, and financial institutions have round-up features that help you save change. They round up your transactions to the nearest dollar amount and then automatically deposit it for you. 

So, if you spend $12.49 on your lunch, $0.51 is automatically deposited into your savings. 

These round-ups may seem small but can add up quickly.  

Start small

Perhaps the simplest advice is to start small, even as small as a few dollars a day. 

I won’t give you the generic advice to cut your daily latte, but if you make cuts to small purchases and instead feed it to your savings, you’ll see a difference in a few months. 

Keep saving even after you reach your target 

Once you hit your goal, that doesn’t mean you have to stop saving. The sky’s the limit to how much you can save!

READ MORE: Take Control of Your Finances With These 5 Smart Money Tips

FAQs

How long does it take to build an emergency fund?

It takes time to build an emergency fund. Depending on your situation, it could take anywhere from six months to a few years. 

The time frame depends on your income, expenses, and your financial discipline. 

To be safe, you should expect to spend up to two years saving.

Is $5,000 enough for an emergency fund?

$5,000 is a great start to an emergency fund, and for some may even cover a couple of months of expenses. 

However, depending on your monthly expenses it may not be enough. This just depends on your lifestyle and financial situation. 

TL;DR: Building an Emergency Fund

Building an emergency fund takes time, effort, and the right amount of financial discipline. You’ll need to calculate your monthly expenses, then work towards setting that amount aside, ideally in a high-yield savings account like the SoFi Checking and Savings Account. 

While it's usually recommended to save three to six months of your expenses, give yourself grace if you can’t achieve this right away. 

Depending on your income and situation, an emergency fund may look different to you. Whether you have $1,000 or $20,000, be patient with yourself on the journey. 

For more tips on setting yourself up financially, check out these episodes of the Erika Taught Me podcast:

• 10 Steps Towards Financial Wholeness
• How To Budget for Beginners
• How to Become Better With Money

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