A Step-By-Step Guide to Building a Big, Healthy Emergency Fund

Lauren writes to me, lamenting her difficulties with an emergency fund:

I want to have an emergency fund, but every time I think about the amount of money I would have to save, I talk myself out of starting. Instead, I find something else to spend the money on and then something happens and I regret not having that fund.

Over the last couple months, I’ve bought a big pile of DVDs to cure the winter blues. I’ve easily dropped hundreds of dollars on them. A few days ago, my car broke down and the bill was… hundreds of dollars.

Can you help me get started with an emergency fund? I feel like I’m missing something.

At almost the same time, I spied an interesting comment over at Lifehacker:

My goal is the 8 month saving expense plan that Suzie Orman always talks about. To have enough saved up to FULLY pay all expenses for 8 months…it’s really difficult to do, but as long as you keep the focus on it, once it’s accomplished, it’ll be such a good emergency buffer.

Yes, Suze does preach about an eight month emergency fund. It’s a great goal, but it’s a pretty lofty and intimidating one for many people.

It seems that, in this economy, a lot of people are thinking seriously about their emergency funds. Frankly, I think that’s a very good thing – emergency funds are a key part of a healthy personal finance situation. The biggest problem, though, is that it’s intimidatingeight months? That’s a lot of savings.

Trust me, it’s not as hard as it sounds. Three years ago, my wife and I were nearly bankrupt. Today, we have an emergency fund that’s actually larger than Orman’s recommendation – we’d be fine easily through the end of the year if things fell apart. You can do this. Here’s how.

Why An Emergency Fund?
The first step along the way is to understand what an emergency fund actually is. An emergency fund is cash that you’ve saved up for the sole purpose of helping you maintain your normal life through the emergencies that life hands you. Most of the time, you shouldn’t touch the emergency fund at all – it just sits there earning a bit of interest and waiting until you actually need it. When you lose your job. When an appliance breaks down. When your car needs a repair.

Quite often, people who don’t have an emergency fund see the idea of having to save up money as some form of punishment – after all, money put in a savings account and locked away is money that can’t be used to live, right?

Actually, it’s quite the opposite – having an emergency fund means that you do have room to breathe. You don’t have to completely panic if your car breaks down or if you lose your job or if you suddenly need to replace a hot water heater. Instead of having to find some way to squeeze those expenses onto a credit card or beg a friend for some money to help, you can just pay the bill – no worries.

Another problem that I often hear about when it comes to emergency funds is the temptation that people have to spend the money on things that aren’t emergencies. They see that they’ve built up several hundred dollars in savings and they start thinking about buying a flat panel television or going on a trip – and that’s just what they do.

If you want to have a savings account for big splurges, that’s great – start a “splurge fund,” too, if it makes sense for you. It’s important, though, to just leave the emergency fund completely alone until you need it. Deposit money in there and don’t even look at the balance until an actual emergency occurs.

Set Your Initial Target Low
So, what’s the first step? Many people bite off a gigantic goal for their emergency fund right off the bat and then find that it’s very hard to get there. Eight months of living expenses is an enormous goal, one that will take years to reach – and along the way, you’re bound to get disheartened.

Instead, one great way to start is to set a goal that’s more reasonable. Make it your initial goal to have an emergency fund of just $250 or $500. That’s a goal that you can reach in just a few months (or even less if you’re in a good income situation) and yet it’s an amount that can make a huge difference when you have an emergency.

Then, break that goal down into smaller pieces. Perhaps you can save $25 a week. If that’s the case, you can have a $250 emergency fund in just ten weeks, so you can set that as your overall goal. Maybe you can put away $40 a week, which would bring you to the $500 goal in three months.

My advice is to not set your savings plan too high at first, either in terms of the amount you can save each week or the overall amount. It should challenge you just a bit, but not be a number that’s simply unreachable.

Find Your Breathing Room
“That’s great,” you’re thinking, “but where am I going to come up with $25 a week? I barely make ends meet now.”

That’s a pretty typical sentiment from people who are just beginning to turn their financial situation around. There are a lot of ways to come up with extra money throughout the month. Here are ten big things you can do to get the ball rolling.

Request a rate reduction on your credit cards If you’re carrying a credit card balance, getting your interest rate reduced will directly save you money each month. Just flip over your credit card, call the number on the back, ask to speak to a supervisor, and simply request that the rate be reduced. Suggest that you’re considering transferring your balance off of the card.

Shop around for better auto insurance and homeowners insurance. Try Progressive, Geico, American Family, State Farm, and AIG, for starters. Just visit their websites, get some quotes, and make a switch.

Install a programmable thermostat – and program it. Pretty simple, actually – it just takes thirty minutes or so and will cut your cooling and heating bill by 20 or 30 percent. Set it so that the air conditioner and/or furnace don’t run while you’re sleeping or at work so that the energy isn’t wasted when no one is around or awake to enjoy it.

Use a list for grocery shopping. Ten minutes of planning before you go will save you at least ten minutes in the store, plus it will help you stay focused on the stuff you actually need, reducing your grocery bill because you’re putting less unnecessary stuff in the cart.

Transform one splurge a month. Instead of going out for an expensive dinner once a month, turn that dinner into a meal prepared at home. You’ll save quite a bit even if you prepare something very fancy in your own kitchen.

Set up a carpool. Find someone that lives fairly close to you that works where you do and start carpooling together. Even if you can only do it a few days a week, you’ll still drastically cut down on your commute costs, plus it will be a lot harder to stop for those impulse splurges.

Use public transportation. Even better, get in the habit of using public transportation for your commuting needs. Most metropolitan areas have surprisingly good public transportation options – and they’re far cheaper (and not all that much more time consuming) than driving yourself.

Get on the bike. Want to start getting in better shape? Only live a mile or two from your work? That’s a perfect situation to get a bike and start using it for the commute instead of wasting your dollars on gas and car maintenance.

Trim unnecessary monthly bills. Are you subscribing to Netflix but rarely using it? Cut it! Are you paying for premium cable channels that you never watch? Trim them!

Snowflake. Quite often, when people come into a bit of unexpected money, they tend to spend it without thinking about it. They decide not to stop for coffee, but then choose to spend it later on take out, for example. Instead of spending that “found money,” take some or all of it and immediately put it into your emergency fund. If you have online banking, that’s pretty easy – just transfer it out of your checking account.

The key thing here is to actually save this savings. Instead of just spending the money on something else, put that money away towards your emergency fund. If you find that you’re actually saving more than $50 a week with these tactics, then put more into the emergency fund or increase the amount you’re putting into your retirement savings.

Make It Automatic
So, you’ve trimmed $50 a week from your spending, but now you have this cash sitting there and it’s tempting to spend it on something more exciting than an emergency fund. You’re tempted…

… but you don’t have to be tempted. Instead, you can set up an automatic savings plan to sweep that money straight out of your checking account and into your savings account that you’re using for an emergency fund.

If you haven’t already, I recommend setting up an online savings account at a bank separate than the one you normally do business with for your emergency fund. Doing this not only lets you shop around for a bank with good service and good savings account rates, but it also causes you to put the money in a place that’s not quite so easy to access. You can’t just run to the ATM or stop by the teller window and withdraw cash from it – you have to go to your computer, order a transfer, and wait for a day or two to access the cash, which is more than enough time for you to think carefully about what you’re doing and not get sucked in by impulse.

So, sign up for an online savings account with good service and a solid interest rate, set up an automatic plan at that bank to sweep $50 (or whatever you can save) a week into that savings account, and then forget about it. Since you’ve already freed up that money through tightening your belt just a bit, this should be quite easy to do.

Set Reasonable Milestones Along the Way
In a few months, you’ll hit that first milestone – and it’ll feel good. That account will have enough money in it that it’ll start earning a bit of interest on its own and you’ll start to feel in control of the situation.

Now’s the time to keep going. Set another goal – an emergency fund of $1,000. Keep that automatic savings plan in place.

Once you reach that goal, aim for a single month’s worth of living expenses. Then two months. Then three. And just keep watching that emergency fund grow.

Obviously, when you do have an emergency, tap that fund. Don’t put your car repair bill on the credit card. Don’t start living on plastic while you’re between jobs. Instead, keep living a financially stable life thanks to your planning ahead.

You might just find that this is a lot of fun – so you might start seeking out more ways to save. Just keep setting goals for yourself and keep pushing yourself just a little to make it there.

Before you know it, your life won’t be disrupted by these kinds of emergencies – and you’ll sleep a lot better at night knowing that.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...

72 thoughts on “A Step-By-Step Guide to Building a Big, Healthy Emergency Fund

  1. Michael says:

    I just started my ‘emergency’ fund of $250 in a savings account with about 2.14% interest. I feel like the initial breakaway from a lifestyle where money goes like crazy, it can be hard to look at $250 and think “that’s great!” when in reality, $250 wouldn’t even pay 1 month on a credit card, let alone rent, food, copayments, the billion other things that could crop up in an emergency(ie a layoff). However, building that slowly and getting the ‘snowball’ rolling, I’m hoping the E fund will increase, the deficit will decrease, and security is on the horizon.

  2. KC says:

    I was going to suggest what you said – low savings targets initially. You also have to attack it like you attack debt – a little at a time, all the time, until its paid. Having a $20k credit card debt is intimidating. But if you can figure out a way to pay it off, why can’t you figure out a way to save $20k? Its the same difference. Well actually its easier to save $20k cause it earns interest making it easier to reach your goal, whereas the debt charges you interest, making it harder to reach your goal. So take bites at it as you can – just like you would if it were debt. Consider it debt you owe to yourself.

  3. Elizabeth says:

    Another thing to think about when it comes to saving up an emergency fund is to reduce your monthly expenses. If for example a person could reduce their living expenses from $2000 to $1500 a month, they only need to save $1500 instead of $2000 to have one month in that emergency fund. And of course, if you can reduce your expenses, you can save the difference in the emergency fund.

  4. BookwormDragon says:

    What if I’m just starting my wage-earning life?
    What percentage of my monthly income should I plan to set aside to build/maintain my emergency fund?

  5. DB Cooper says:

    Great post! I have two “emergency funds” of sorts. One is a regular emergency fund, for true emergencies that occasionally come along. My goal (and my current balance) for this account is $1000. The other I call our “income security” account. The purpose of the income security account is to offset the loss of income for an extended period of time. My goal for this account is $12,000 – I’m not nearly there yet. Both of these accounts have a small amount automatically deposited from each paycheck. Whenever my regular emergency fund gets an “extra” $100, I transfer it over to the income security account.

    Actually, I’m a HUGE fan of multiple savings accounts – I have 10, including the two mentioned above. Every account has a small amount deposited each paycheck. I find it much easier to be disciplined and to refrain from taking money out when the money is in my “next auto” account or my “home improvement” account or my “family health” account and designated for those purposes…and, yes, I do have a “family fun” account for vacations, etc.

    This system may not work for everybody, but I love it, and I’ve managed to save more money in the past year, while also paying down a huge amount of debt (paid off two vehicles and am nearly out of cc debt) than ever in my life.

  6. liv says:

    If you’re just starting out, then just start with $50 per paycheck. if you tally all your expenses and find you have a lot more extra, increase it to whatever is comfortable for you.

    For me, it used to vary, so I used to manually move the money instead of making it automatic. Last month, I finally made it automatic. It’s nice to not have “move money to my savings” on my to-do list every month :)

    Also, if you find that you’ve found your rhythm for saving, and you get a pay increase somehow, then just increase your savings, and pretend you’re still getting paid the same before the increase. sometimes that’s hard because you want to splurge, so if you get for instance, a $3/hr increase, then at least increase your savings by half of that.

  7. Michelle says:

    I was having a hard time getting my mind around even a three month emergency fund – until I broke it down step by step. One month, I set aside enough for gas for our house and car for three months ($450), the next month I set aside enough for three months’ worth of electric bills and our cell phone, and so on. It is working really well!
    http://www.leavingexcess.com/2009/02/emergency-fund-update.html

  8. partgypsy says:

    The number one financial goal we have this year is to build up our emergency fund. I am very excited to do this, but realized even if we saved $500 a month we will only have about 3 months of living expenses by the end of the year, which is a bit disconcerting. So I’m focusing on the direction, not just the amount, and it made me realize building an efund is something that may not be accomplished in 1 year.

  9. Jonathan says:

    Another big advantage of a decent emergency fund is that you will perform better at work. You’re much more likely to stand up for yourself and push through ideas that you think are good. You aren’t as afraid of upset the boss by putting yourself out there. In return, you may seem more as a go-getter and more likely for a promotion. I also refer to it as the “screw you fund” (or other bads words :) This could also extend to a situtation where you found yourself in a compromising ethical spot.

  10. daub815 says:

    I’ve been setting aside a large portion of my income for my emergency fund. But I just have one issue, every time rent comes, I have to pull out a little bit so I don’t over draw. I think I just need to balance things nicer, but it is irritating to save say $250 a week then transfer $500 a month back to my checking.

  11. Michael says:

    daub..why wouldn’t you just save $100/wk instead and avoid transferring $250?

  12. CBus says:

    @BookwormDragon,

    What an enviable situation you are in. To enter the workforce without a preconception of what it feels like to live “AT your means (ie spending exactly as much as you earn).” I’d recommend developing a budg…ahem…SPENDING PLAN to cover your bases. I mean, thats what it is, you’re making a list of how you are going to spending your money, so you might as well be informed. You can use the following rules of thumb (please note that some thumbs are wider than others [ie YMMV]).

    CBus Rules of Thumb:
    Your net paycheck will equal about 70% of your gross (I know, its redic! … its like they are giving your taxes straight to a couple of banks, or something)
    Your housing shall account for less than 30% of your gross (obviously lower is better, with a roommate, 12-15% about avg, alone shoot for 20%, or mom’s basement (ideal for t =< 1yr))
    Utilities will always be about $30 more per utility than any landlord will admit (I apologize to the honest landlord out there)
    Grocery shopping is fun and you can easily go through $200/mo for yourself. Bring home some circulars and make a list, save $50+ a month. Perishables do perish, so freeze stuff you know will be a while till you use.
    Throw 5-10% into a _separate account_ for NEXT MONTH’s fun money (Say $100-$250).
    Throw 15% of your paycheck into a _separate savings account_ as a start. (adjust month to month as needed. this will be your E fund)
    Contribute up to the match of an employer 401k/403b/TSP
    Deposit rest of paycheck in a _checking account_
    Pay off cc debt
    Start a Roth IRA (easy to do, the Vangaurd/Fidelity/etc people are friendly and are there to help you through it)
    Your car insurance, car taxes, renters insurance, vacation expenses, and heating bills will always occur at the most inconvenient times. Be sure to account for these in your spending plan.
    Have fun, you’re young, meet people and stay safe about it. A cab might cost $40 from downtown. DUIs start around $4k after tax, tag, title, bail, probation, fees, lawyer stuff, impound, towing, license fees, re-registration, and classes. And we haven’t even talked about recurring costs of car insurance premiums, or medical expenses. If you take a taxi once a weekend night for two years straight, you still come out ahead.
    Stay safe. A kid cost a quarter mil ($250k-ish) to raise till 18. Alternatives are rarely more than a quarter in even the shadiest gas stations.

    If you sketch out a budget and use these rules of thumb, you’ll be in good shape. Adjust your E-fund amount. If you feel the stock market is poised for a rebound, then contribute to Roth and make the minimums on your cc’s. If you think the stock market will be chillin at these levels, or lower, than knock of those cc’s. I’m not a financial advisor, but I’m 3 yrs into my working life, so I’m feeling where you’re at. If I could do it again, that’s how I would roll. And I would have gotten a roommate much earlier than I did.

    Good Luck!

  13. Not sold on big Emergency funds.

    I think your money would be better spent elsewhere. I think a small emergency fund will do. From there skills and knowledge should be acquired.

    You don’t cure a fear by giving into it. You need to understand the fear, and where its coming from – is it logical.

    -Nate

  14. daub815 says:

    @Michael I guess I just like the idea that at least I am trying to sock away as much as possible. I just need to rework it to better manage how much goes in and out.

  15. Sarah says:

    Is there not a library near Lauren’s house? I ask because most libraries let you check out DVDs. I can’t understand buying dvds as they collect dust after you watch them. I think she should try to sell them on ebay or amazon or one of those similar sites. Maybe she can then use that money to start an emergency fund.

  16. Jason says:

    If you have a mortgage that allows you to redraw wouldn’t you be better off having the money in there rather than an interest bearing account? Esp. considering mortgages are always higher interest?

    Depending on your interest rate and the amount you put in generally the redraw fee is saved in a matter of days.

    You may want to keep a smaller amount in an instantly available account for dire emergencies.

  17. Troy says:

    I guess it depends on the definition of an emergency fund.

    Most people categorize money into different arena’s, retirement, savings, emergency, fun, money for bills, etc.

    I don’t follow that route. Money is money.

    If you set aside money on a regular basis and save it, regardless of the vehicle it is saved in, then you have a cushion, and that is the point.

    Have a cushion. A cushion for emergencies, for retirement, for the new car, whatever. It is really all the same.

    I find it a bit amusing that so many people advocate financial trickery or forced ignorance.

    The “if you don’t see it, you won’t miss it” line regarding pre-tax retirement contributions.

    OR the “automatic transfer money to savings” so you don’t forget and don’t notice.

    I don’t follow that. What I follow is know what you earn – before taxes. Subtract your living expenses and account for taxes. Save the rest somehow somewhere.

    Need to save more? Reduce your living expenses or earn more or both. Three choices.

    Save the rest in a vehicle you UNDERSTAND and CONTROL. Simple.

  18. Johanna says:

    I would argue that things like car repairs or home repairs are in a separate class of emergencies from things like job losses or things like medical emergencies. Cars, furnaces, home appliances, and the like break down infrequently, but fairly regularly – if you own a home or a car for long enough, the odds are good that something’s going to break down and need to be fixed. Saving for these kinds of repairs, I think, should be considered part of the normal cost of owning a car or owning a home. If you can’t afford to do it on top of everything else you’re doing, then you can’t afford that car or that home.

    @BookwormDragon: How much should you save when you’re starting your working life? The easy answer is, as much as you can. Now is the very best time for you to learn to be happy in life without spending lots of money on “stuff.” Trent wrote a good post a while ago about the “50% solution” where he suggests aiming to save half your income. That might not be doable for you – or you might be able to do even better – but the idea is, if you’re going to set your sights high for how much you can save, it’s best to do so right from the start.

  19. K says:

    I agree that you should set your target low at first. Maybe take that unexpected car bill and make that your goal of savings. That way, if the same thing happens again, you’ll have the money. If you say “I need to save up $10,000,” you might think it’s impossible and never get started. But if you say “I want to have the money for my next car repair already in a savings account,” then you can set aside $25 every paycheck and have that saved up in 6 months. At that point you can say, “now I’m saving up for when I need to replace the dishwasher.” Make it little incremental goals so it’s more motivating, and at the same time, you will be putting a realistic picture to it to make you realize how important it is to have that socked away.

    Trent’s suggestions are good, but I suggest that you just take a certain amount and put it directly from your paycheck into a savings account so you don’t miss it.

  20. Stacey says:

    I took up a challenge from another frugal blogger to set a weekly food budget for the month of February. I decided to make it quite challenging – spending $80 a month instead of $150 for my family of three. I was able to come in *under* that budget for the month and still host a friend to stay with us and 2 major parties. It was a great to see that my family could live cheerfully on so much less – and put away a lot more money towards savings. You can read more about what it looks like in my home here:

    http://myfriendoprah.blogspot.com/2009/03/whats-cooking-32-38.html

  21. George says:

    Has anybody found a web site that has some guidelines (in actual dollar amounts) for emergency fund amounts? I know that “3-6 months of expenses” is often quoted from Dave Ramsey, but I’m curious as to what that means in real-world dollars.

    For us, our “big” emergency fund goal is $20,000, which would be enough to buffer us through a job loss or major medical issue. We also keep a “small” emergency fund (goal: $2000) which we use to pay large irregular expenses that don’t really qualify as emergencies (car maintenance/repairs, household repairs, life insurance premiums etc). This is for a young family with two small children and a fairly large mortgage.

    Does anybody else have pointers to blogs or websites with dollar-value guidelines for E-Funds?

  22. Todd says:

    I’m a big fan of the emergency fund.

    My wife and I spent three years building up a decent emergency fund and are we glad we did. I lost my job last September (after not getting paid for three months before that), and we’re currently living off of the emergency fund. It’s not fun. We worked hard to build that up and it’s sad to see it go, but much better than to have to foreclose on our condo. And we recently got a bill for a 5 day hospital stay that my son had – $8,000 (that’s the part insurance (which we’re paying out of pocket) DIDN’T cover.)

    Without our hard earned emergency fund money, we would likely be declaring bankruptcy.

  23. rrgg says:

    Another thing to remember — Is your company paying for health insurance? If you’re out of work, that may be a new expense. You need to save for that as well.

  24. Alexandra says:

    What we do is that we take gurantees on all of our appliances, and suppose that they WILL break immediately after the guarantee expires. If there is no guarantee, we suppose it will last for two years (usually fairly accurate on average). If it’s a piece of furniture, we ask ourselves when we plan on replacing it. Then we divide the price of the object by the number of months until replacement date… And add all that up and that’s the amount of money to save every month.
    So now when we want to buy something new, we take the money out of that account – it was saved for ! And then, if it’s more expensive than what we are replacing, we divide the price difference and add it (if we’re replacing a $500 fridge by a $800 one, with a 5-year guarantee, that’s $5 extra per month we need to put into savings. IF we can’t, then we can’t afford the fridge) If it’s something entirely new (furniture, a car – we live without one – then we add it entirely…)
    That way we always have money in that account and if something truely unexpected comes up, we’re covered although it might deplete our fund. Plus… sometimes stuff lasts WAAAAY past the guarantee!

    BUT – we don’t live in an area with natural disasters, we have renters insurance that covers A LOT, my husband has a government job which he can’t lose unless he commits a crime, when we start our family we will get life insurance,

  25. Alexandra says:

    What we do is that we take guarantees on all of our appliances, and suppose that they WILL break immediately after the guarantee expires. If there is no guarantee, we suppose it will last for two years (usually fairly accurate on average). If it’s a piece of furniture, we ask ourselves when we plan on replacing it. Then we divide the price of the object by the number of months until replacement date… And add all that up and that’s the amount of money to save every month.
    So now when we want to buy something new, we take the money out of that account – it was saved for ! And then, if it’s more expensive than what we are replacing, we divide the price difference and add it (if we’re replacing a $500 fridge by a $800 one, with a 5-year guarantee, that’s $5 extra per month we need to put into savings. IF we can’t, then we can’t afford the fridge) If it’s something entirely new (furniture, a car – we live without one – then we add it entirely…)
    That way we always have money in that account and if something truly unexpected comes up, we’re covered although it might deplete our fund. Plus… sometimes stuff lasts WAAAAY past the guarantee!

    BUT – we don’t live in an area with natural disasters, we have renters insurance that covers A LOT, my husband has a government job – with full benefits including retirement and healthcare – which he can’t lose unless he commits a crime, when we start our family we will get life insurance… so we aren’t really afraid of “emergencies”.

  26. MegB says:

    @ George:

    Three to six months of expenses is what most financial advisors suggest. Not too long ago, I wanted to know what 3-6 months of expenses would mean to us in real dollars, so I just put pen to paper. Most of our bills are fixed, and the others generally are around a certain amount, so they were easy to estimate. I went through the checkbook and listed all of our bills for one month–mortgage, home and car insurance, life insurance, cell phone, utilities, car payment, etc. Basically, everything that comes due once a month went on the list. Then I added about $200 a month for groceries and another $100 a month for gas, just to be conservative. I totaled up the amounts for one month and multiplied by three, four, five, and six so that I could see how much the total emergency fund would need to be (i.e. 3 months worth of expenses would be x dollars). The whole process took me about 30-45 minutes, but now I keep the chart (all done by hand) in my tote bag and look at it occasionally to remind me what I’m working toward.

  27. garbo says:

    Other ways to find money to bolster your emergency fund:

    I do an audit every 6 months or so for those small expenses that have crept up: do I really need the 3 DVD Netflix package or could I do with the 1 at a time; have I signed up for a 4.99/mo web site that I really don’t visit; do I need ALL those cable channels…etc. I reroute those funds directly to savings via automatic transfer to ING. During one such audit I was able to identify $156 per month of unnecessary spending.

    I also love this one: If you use coupons to save money at the grocery store or have a frequent shopper discount card, keep the receipts and move the amount you “saved” into your actual savings account.

  28. Great post! The emergency fund is exactly my current project right now!

  29. NYC reader says:

    1. Take your tax refund check and deposit it directly into your emergency fund. It’s a good way to jumpstart your e-fund.

    2. When you get a raise or bonus, allocate most of it toward your emergency fund. For example, if you get a bonus of $665, allocate $500 or $600 toward the e-fund. You’ll still have a bit of money to splurge on something (you do need to enjoy life, after all), and you won’t miss the extra money. Same for a raise; if you get raise of $40@week, sweep $20 or $30 automatically into your savings. You’ll never miss it, and you’ll feel a little bump from the $10 or so you keep in your pocket (two lattes!).

  30. Jonathan says:

    Feedflix.com is a cool site that shows how much you are paying per title for your netflix plan. It tracks your returns and what you watch online. I pay .80 per movie (including instant watch) with my one blu ray at a time unlimited plan.

    Consider other options like redbox or the local library to save money on movie watching. However, I refuse to give up netflix because I use “watch instantly” as a replacement for cable TV.

  31. DB Cooper says:

    @NYC Reader said “For example, if you get a bonus of $665, allocate $500 or $600 toward the e-fund.”

    I see people on personal finance sites, or read PF books, and they always talk about getting a “bonus.” I honestly don’t personally know a single person that gets a bonus from his/her employer. Is that just me?

  32. forty2 says:

    AIG? With all our tax money they’ve gotten they should be insuring people for free.

    Srsly, USAA is an excellent and solid company for insurance, if you qualify.

  33. Ken says:

    Good advice about breaking it into smaller steps…mini goals if you like. The point is start with something…even $5 a week is a start. If you have trouble finding the heart, just think about the pain of NOT being ready for the next emergency that WILL come.

  34. I keep my emergency fund as a set of $300 GICs at ING. I’ve got four months of expenses there, which I think is quite sufficient for a single person in a “recession proof” job (nursing).

    The reason that I keep it in accounts of just $300 is so that I’ll only redeem as much as necessary in case of emergency. If I lose my job, I’ll have to cash in several of them, but if I need emergency dental work or something like that, 1 or 2 of the GICs will do.

    The reason that I use GICs as the vehicle is so that I’ll be motivated to only cash them if I really need to. If I cash them out earlier, I’ll have a small loss of interest (1.5% instead of 4% or whatever the rate was when I opened it). To me, that’s a good balance of accessibility vs. disincentive to use the money.

  35. Great Advice. I love your blog. My wife receives your emails and we are applying many of the things you write.

    It is great to know that others are successfully walking the path ahead. It took me awhile to figure out the importance of an emergency fund. I sleep better at night knowing that if something were to happen that we at least have a cushion.

    God Bless,

    Matt Sullivan

  36. Mia says:

    I’m curious, will credit card companies still lower your interest rate just by asking? In this current economic climate, I’ve actually heard of people who are receiving notices that their interest rates are increasing. These were people who had good credit scores. Overall, I like the idea of an emergency fund and the first tip of starting small has actually inspired to put a little more heat on this goal for myself.

  37. goldsmith says:

    I think Trent’s suggestions are excellent for getting started. One psychological problem arises when debts are paid off and the e-fund is getting larger, that it becomes more difficult to motivate oneself into saving hard. Also, at that stage, you will probably need to dip into the e-fund for the aforementioned repairs, so the total goes down again. My e-fund has remained stuck in the 5000 to 7000 Euro bracket for some years now.

    In term of how much you ultimately need, all of those recommendations of financial experts are just ballpark figures. If you really want to know for yourself, nothing will save you from looking into your own situation in detail and then crunching the figures.

    I would start with making a list of the situations of catastrophic loss you want to protect against. I have three:

    A house fire in which I lose the entire contents of my home;

    Permanent disablement to the extent that I am unable to do paid work, even part-time;

    Losing my job (not highly likely as I am a government employee in an EU country; however, if my country needs to call in the International Monetary Fund to sort out its finances, this might nevertheless occur).

    The first of these is covered by my home insurance, which I have just bumped up by 12,000 Euro (it’s amazing how much stuff you buy or are gifted over a couple of years even as a frugal person!)

    The second scenario is taken care of by all of the following:

    - social security disability payments
    - special medical entitlements like free family doctor visits and medications, akin to Medicare in the US
    - the disability pension I would be entitled for under my work contract
    - my mortgage insurance which covers disability in addition to life. All of these combined would permit me to eke out a modest existence if worse come to worse.

    The third scenario, while unlikely, is not adequately covered at the moment. Still, factoring in

    - ALL welfare entitlements,
    - reducing monthly outgoings by current savings commitments and mortgage overpayments and
    - a realistic appraisal of outgoings (would I travel as I do now? Would I buy beautiful objects for my home as I do now? Would I drive my car as much?)

    When I do this, I arrive at a figure that’s MUCH lower than the monthly expenses tracked in my spreadsheet. Once you have that figure, multiply it as another commentator suggested, and go aiming for it. It might need reviewing once in a while, but is likely to be a good deal less dramatic than what you think it is when you hear: “Three month’s living expenses” and base that on your current outgoings.

  38. Rachel says:

    Great post Trent!
    A coulpe of things not mentioned that might be worth discussing:
    * a month’s living expenses isn’t the same as a month’s salary. If laid off, some parts of the budget might have to be let go – entertainment budget, etc – and as commenters have pointed out, others might go up – such as having to pay for your health ins. When the EF gets big enough to start thinking about covering x months expenses, that is the time to sit down and work out exactly how much that is.
    * another point that I haven’t really seen mentioned is post-emergency behavior (possibly worth a separate post?) If you built up your EF, then channeled the monthly contributions elsewhere, how should you structure the rebuilding of the portion of the fund you used? Or should you make the EF contribution a permanent one, and transfer the overflow into savings (really the same as rechanneling the contribution, but possibly easier psychologically when time comes to recoup after the emergency)?

    Keep up the good work!

  39. Nothing worthwhile is easy. Starting small is the way to go– make a game of it. Small successes lead to big successes, lead to bigger successes . . .

  40. Sandra says:

    Had to share how once again you inspired me to get back on track Trent. I am in a new financial situation with being on my own now and having some pretty difficult health issues besides. But have been able to keep my excellent credit rating even on my own and less than $700/month income. (Even have a 0% credit card.) With using tons of your ideas of course. Thought you would like to see an example of how your efforts go beyond your small family:

    Dear Sisters,

    This is one of the main budgeting letters I subscribe to every day. It has been so much help from free cable to breakfast burritos, super nutritious, (I do egg mcmuffins too and diabetic pancakes) made ahead for about .75 and good to grab on the way out. (I did ‘blow’ $2 for the cutest leaf pancake molds at a second hand store yesterday.) (I use my free upright freezer, they are available every where.)

    I was thinking what could help me build my emergency fund again. I was doing fairly well then hit a depression last week and blew $75. Bummer, but I remember I had such good
    ‘reasons’ and it was going to be truly worth it…and of course I would be able to put it right back in…the first was only 3 days away…YOU GIRLS WE ALL KNOW THIS ONE.

    And then I remembered today a idea that may help if you want to band together. It is to have a few others join in with the same goal. Encouragement helps in many things right?

    So would you like to join together to set a goal, we will each have our own, and work on this in these hard times? Mine is to find $10/week to put back into a separate savings account set up for only this purpose.

    I had tried something a close friend in the past did. (Nita did this and she was always able to come up with the $5 for gas or the french fry money for our kids) With every use of my debit card or writing a check I round up to the next $. It can be hard when it is $9.03 but I just added up the savings I ‘did not see’… in just one month—$32.60. Half the amount I ended up withdrawing from my emergency fund.

    And so my guilt at my withdrawal was just cut in half!

    Then I added my change up that I put aside and throw in a dish on the table. I hit this dish regularly for laundry, love the free drying on Tues and Thurs I just found out about, and for parking meters, or a Pepsi once in a while.

    And also keeping those pennies myself instead of donating them to the gas station…another sister’s example..just added it up and $4.02 was saved without any pain. .52 WAS PENNIES IN ONE MONTH.

    Total saved and ready to try an on-line account is $36.62— short of my goal. BUT WAIT I REMEMBER A REFUND CHECK AROUND HERE BE RIGHT BACK….a suggestion from this kid who does this Simple Dollar letter, is to always put away ‘free’ money… and here it is $5.62.

    Another total…$42.24 I MADE IT I MADE IT I MADE IT!!!!and over my $40/month goal.

    I had been so discouraged from my weakness I wasn’t going to try anymore. Figured I was to broke for such a thing as an emergency fund. So this budgeting letter got me back on track again. HOORAY TRENT!

    It was hard and I did miss that amount of money but couldn’t stop to think where it was at. I forgot this plan would cost money everyday I wouldn’t have to spend on others things.

    But I was truly within a few days able to do it automatically. I did not remember even until I read this and thought of you to help pick me up and want to try again.

    I have heard of how to find banks on-line that are reliable and make pretty good interest. Even a few pennies here and there help right?

    And on top of that I still ended up with $30 left in savings from a goal started two months ago that the $75 was a part of. So I am going to continue to put that $40/month in for when insurance comes up.

    Not bad for less than $700/month income right. Most that work full time can’t even accomplish this.

    So if you want to join this “club” or no any of the friends that do let me know. I want to keep it all on-line and not discussed at the Kingdom Hall where our focus is spiritual riches not material. Jehovah has just proved
    to me again he provides abundantly which means less stress with even a little.

    S.

    And I go back to school for my Dental Assistant degree today. I am feeling that much better with this liver treatment.

    Most of you know my two favorite sayings these days:

    “A million good, fifty bad”, when asked how I am.

    “If you loan a friend $20 and they disappear with it, it was probably worth the $20.”

    And you weren’t sure if this making money doing what you loved would be worth it, if I remember in the beginning Trent. It sure has been worth it to me and many I have sent your way.
    Sandy

  41. Neal Frankle says:

    Before the financial crisis hit….my kids considered doing whatever they wanted whenever they wanted a necessity. (I know, we spoiled them….)

    Now, they are starting to get it. I am just glad they are getting this lesson now.

  42. Frugal Liz says:

    My husband and I started our emergency fund 8 years ago when we got our first tax refund. It was a little over $3000. Every year we save our tax refund and my husband’s bonus from work. Together they total around $11,000. That money has really saved us from going into debt, because we’re able to use it if anything happens.

  43. Sandy says:

    The emergency fund tht we have is our own personal safety net. Wherever you are in life, if you have a good safety net like this (and once started, you’ll be surprised how fast it can grow), you’ll feel better about things that come up. I also used to think that we could not save that much. But little by little, saving here and there, money really does add up.
    Someone mentioned bonuses and tax refunds. If you get one, please think about not blowing it on stuff. Saving the majority (or all of it…pretend you never got it)will put you in a far better shape in years to come than a great new TV. We do get a bonus, and we split it between paying down our mortgage and saving for our girls’ education (in 5 year CDs, actually, through our state’s tuition program).
    But we could only have done this by having that emergency fund to begin with.

  44. john d says:

    thanks for the well timed post. I was lying in bed this morning thinking about this very thing!

  45. Terri says:

    Hi,
    I have a bank that offers a “Bank the Rest” program. Every debit purchase is rounded up to the nearest $1 or $5 and the difference is automatically deposited into a savings account. In 8 months I saved $89.32 by rounding up to the nearest $1.

  46. Melissa says:

    @Sarah:

    Have you ever rented a DVD from your library? I have. About 75% of the time, they’re too scratched to watch.

    A more reasonable approach (if DVDs are important to you; I decided I could do without) is Netflix.

  47. Carmen says:

    @Rachel (and Trent)
    I too would love to see a post on a financial emergency action plan for if you’re laid off or laid up…

  48. Eric says:

    Without having read previous comments and at the risk of repeating a previous comment I would add the following:

    Since it’s tax season and many people receive refunds, if it’s feasible, consider using your refund check (or a part of it) to start your Emergency fund.

  49. Roxanne says:

    I use my ING account to regulary transfer a set amount of money from my main checking account to my ING savings account to build up our emergency fund. Once our monthly payments to the orthodontist ended for one of our sons, I then added that amount to the amount I was transferring each month. I also increased this amount when getting a small raise one time.

  50. DivaJean says:

    Emergengy funds are critical!

    I was laid off just Thursday. My severance package is for 5 1/2 months pay and I will be insured thru this time frame. Then I am elgible for unemployment.

    My emergency money could theoretically cover me another 6 months and this is without my tax refund for 2008-which could take me and the family another few months. It seems very implausible for me to not get job in over a year’s time.

    I don’t know what I would do if didn’t have it.

  51. Mona says:

    I am also in the process of building my emergency fund. I had started last year and ended up using it for a down-payment on my home. I know, not what it was set up for, but I was glad that I had gotten into the habit of saving.

    A couple of strategies that I use to save more:

    1. I recently opened an online savings acct as well. Mine is through SmartyPig. I did this to foster the “habit” of saving.

    2. When I have extra money, I pay my bills up ahead at least a month. This “savings” doesn’t necessarily accrue interest… but rather it awards me with “breathing room”.

    3. When I feel the need to splurge (reward myself for all my hard work), I will sometimes throw money that I would have spent on a night out into my saving as my reward, then stay home watch a movie on Hulu.

  52. Karen says:

    A solid emergency fund=a good night’s sleep : )

  53. MK says:

    Like the OP from response #5 I also have a multitude of savings accounts that I have automatically withdrawn from my brick and mortar bank on a bi-weekly basis. Small amounts for each, but a pretty substantial amount total. It does make it a lot easier to have that money earmarked for certain things. I feel less of an urge to use that money on something that it isn’t already designated for.
    Another thing I have started doing though, in an effort to build up my EF to my goal amount at a fast pace is by rolling over my remaining balance in my brick and mortar bank at the end of each month into my EF. What I mean by this is once all bills are paid for the month, from my biweekly paychecks if there is anything left over for the month I take that total amount and roll most of it right into my EF. Some of it is disbursed into the other savings accounts but the majority goes right to that EF. I find this particularly helpful because some months I do go over my spending limits, so it’s nice to have the cushion in my brick and mortar account that I use to pay for monthly expenses. So, pretty much at the beginning of each month I start from zero in my bank account and have to make sure the expenses aren’t more than my income. Just my little way of keeping myself in check while saving a substantial amount of money! Because otherwise I’d see my brick and mortar bank account with an extra 200 dollars in it and think “shopping spree!”

    Just an idea!

  54. Beth says:

    DB Cooper- I didn’t think anyone handled money quite like I do until I read your comment. I too have several accounts…7 and counting. I use one for an emergency fund from job loss, health — basically big ticket items. Then I have a car maintenance and home maintenance fund. I also have a few “spending” accounts like Christmas and vacations. When people find this out, the most popular reaction is of shock. But it really works for my husband and I. I know when something happens I probably have it covered! And yes DB Cooper my husband, my neighbor and my father receive bonus’ (3 different fields as well). Our emergency fund was created uniquely since we used all the “gift money” from our wedding reception to fund it. I felt it was the best way to “spend” the money, was to give us financial peace of mind. The rest of the funds I treat like a normal bill like our cell phones and such, I transfer x amount at the beginning of each pay period and whatever is not used that year will roll over into the next. The next fund I am currently creating is my I want to buy my next car in cash fund, we just paid off my car last Friday!! So I am going to set aside that monthly car payment into my cash for car fund! Good luck to anyone who is starting out, once you get towards the comfort zone you can start saving for sunny day funds and that is a lot more fun!!!

  55. Medgar says:

    I was in this situation about a year ago. If you take a step back and look at your situation you will find almost $1000.00 in six months.

    I was broke and in debt but still had cable, still had netflix, still had cell phone, still paid long distance on landline.

    Stopped cable or satellite saved $80/month
    Stopped netflix $10/month
    Lowered cell phone bill to min. and didn’t talk while driving or talk for no reason $60/month
    Made long distance phone calls on cell phone after nine (Free) $25/month

    $175/month x 6months $1050.

    What is funny now I have a 8 month emergency fund and don’t miss any of the things I got rid of.

    The first step is the hardest,
    Medgar

  56. Matt says:

    This is a great post. An emergency fund is the BASIS of any financial plan. It allows the plan to run smoothly and without interruption.

    More people should focus on this. Without it, any move towards investing or getting out of debt will always be thwarted by emergencies.

  57. Jennifer says:

    I agree about starting small. We started with $1000, baby step #1 following Dave Ramsey’s plan. it was an amazing feeling to have $1000 in the bank (actually to have any money in the bank) that wasn’t already earmarked for something. Money just sitting there for no reason – it really took a lot of stress off of us.

    After awhile I felt comfortable with the $1000 and assured that I wasn’t just going to blow it on some big ticket item and we decided to up it to $2000. You see, with 6 people emergencies typically cost $1000 or more it seemed, so we were more comfortable with $2000.

    Then we decided to boost our emergency fund to cover 1 months expenses and then 2 and then 3. We don’t have it fully funded up to the 3 months yet, but taking it in small steps has helped us to adjust mentally to having so much (to us) money in the bank and not feeling like we could spend freely because of the cushion.

  58. mb says:

    for anyone with a low income… nickle and dime yourself. collect loose change and small bills, any small amount of money you can and toss it into a savings account. $0.50 a day, everyday. give it a few years and it will add up to a good amount. i built my e-fund this way, and i have 5 months expenses built up.

  59. TL says:

    I’m another fan of the “little emergency” fund and the “long term” fund. My small account has about $1000 in it, and is at the same bank as my checking account. I’ll pull unexpected dr. copays, appliance repairs, etc. out of this account. If I take $200 out of this account, I have to “find”$200 from my regular bills to replace this money. Maybe I’ll stay in one weekend, or pass up a dinner out. Slowly I’ll replace the money in the little emergency fund so that money is there next time I need it.
    Every paycheck I am contributing to my “long term” fund. This comes out of my checking account automatically, whether the car needs a repair, the dog has an emergency vet visit, whatever. Remember, all those minor emergencies are taken care of with the little fund, giving the long-term fund sufficient room to grow.

  60. Ben says:

    We just had our emergancy fund pay off for us last month. Our furnace went out and without our fund we would have had to finance the whole thing at a horrible rate. Now we’re focusing on building it back up. If it weren’t for the Simple Dollar we would have never been prepared for just this type of emergancy.

  61. Charlotte says:

    No one has mentioned getting a part-time job to built extra funds. I have always had fairly low-income jobs and have frequently worked part-time jobs — and saved ALL of that money. I am now retired and still have very limited income, but I have NO mortgage (nor rent), NO car payment, and NO CC bills. I can live comfortably for years with no income now. I don’t do without anything, and I can travel. With a little self-discipline, anyone can do it. Go back and read some of Trent’s money saving hints. No one of them will add up to much, but, together, they will make a big difference. Believe me, financial peace of mind is a nice thing to have.

  62. Terri says:

    What about when you have college-age children & are trying to maximize the amount of financial assistance you qualify for? That three to eight month emergency fund looks like just another savings account to FAFSA.

  63. Sara says:

    I don’t have an emergency fund, per se. But I do have a savings account that I try to put 4% of my gross pay into. I use that for vacations, primarily, but I will pull money out for an emergency. It’s not that I don’t want to build an emergency fund, it’s that I need to have a little fun and between student loans and paying off my credit card, I can’t squeeze anything else out of my budget. I plan on paying money that I’m currently putting on the credit card into an emergency fund once I get it paid off, or at least down to 30% of it’s credit limit (currently around 50%). Is this a smart move, or should I not pay extra on the CC and put that extra in an emergency fund?

  64. Ryan says:

    I need some help. I’m single, work at a college and live in the dorms with the students. I don’t pay rent, utilities, and I don’t drive to work. (You might think this is ideal, but I also get calls and have to dump alcohol out and have 17 year olds yell at me. BONUS.)

    Emergency funds are usually calculated for married people. Where can I find info about single people. Right now, I’m REALLY close to having a $10,000 emergency fund. Is that enough? I have no debt and hardly any expenses. What is the ideal amount?

  65. mona says:

    The thought of saving 6-8 months of living expenses was too daunting for me too. So I checked to see how much unemployment I would get and estimated the difference in my living expenses – and saved the 6-8 months difference – and now I am working on the total 6-8 months – knowing that I can make it with unemployment as a back-up. Anyway that helped me.

  66. Terry says:

    Todd,

    I can tell you from personal experience that
    the FIRST bill the hospital sends you is probably
    WRONG. It reflects only the insurance they have
    collected up to the point the bill was sent to you.

    Try to contact your insurance company and see
    if they have received everything from the
    hospital. Ask if they are going to cover more
    than that first bill shows especially if it
    includes items the insurance company hasn’t
    seen.

    Once the hospital establishes it’s final
    non-insurance amount that you owe, you
    should be able to set up a payment plan.
    Ask the billing clerk at the hospital very
    politely if she or he can do that.

    In my own experience the hospital was quite
    willing to do so and the monthly amount they
    requested was reasonable and they DIDN’T
    ASK FOR INTEREST.

    This was at our local ‘for profit’ hospital
    so, unfortunately, your milage may vary. But
    I think these days hospitals are happy to
    get ANYTHING more than the insurance reimbursement
    so they may be quite happy to work with you.

    Good luck!

  67. You’re so right Trent… a multiple month emergency fund can become a huge and daunting target. But unlike a debt which has a defined total, an emergency fund can so easily be broken down into parts…

    I say continue the snowball momentum until a 2 or 3 month fund is in place and then automate payments into the fund, as you suggest. Before you know it, you’ll have a solid 6 or 8 month fund locked and loaded!

    Thanks!
    Dave

  68. kev says:

    Hey Trent,
    Do any of your banks in the States have any programs like this http://www.scotiabank.com/BankTheRest ?

    And what is your opinion on this kind of thing?

    (Sorry about the video lady, it’s a lot of messing around to show me something I could see better in a static chart.)

  69. Heather says:

    I’ve been following this blog for over a year and a half and have been debt free for seven months. In that time I have established a good-sized emergency fund. I just had to take my car in and instead of the $400 bill I was expecting, it turned out to be $800. Let me tell you the feeling that I had when the mechanic told me how much it would be…peace. My feeling was peace-I knew that I had the money to cover it and I didn’t have agonize over where I would scrimp and cut and what I would have to do without. I am just waiting for my next paycheck to repay some of that emergency money. So I just wanted to say thanks for the peace Trent.

  70. Golfing Girl says:

    5 years ago we thought we had our financial act together (good salaries, funding 401Ks at 15%, great credit, etc.) but we had ZERO savings and were only one unlucky event from disaster. We had completely ignored the savings aspect of our financial picture. Since then, we paid off a car loan, a 401K loan, and second mortgage. This freed up extra money every month and by the end of this year we will have a 6 month emergency fund. We started small in the beginning (Dave’s baby step 1 of $1000) and then started putting aside that formerly earmarked debt money into savings and never missed it.

    This savings has allowed me the freedom to choose when to go back to work after having our 2nd child. There was no choice with the 1st child, so this savings cushion is quite liberating!

  71. Steve in W MA says:

    In the very beginning you start a small fund for emergencies. Then later as you realize that most of these emergencies are able to be accounted for, you start sinking funds (in addition to the emergency fund) for things like house repair, car repair, car replacement in 8 years, $2000 annual medical copay limit, and suchlike.

    At this point, the emergency fund needs a new purpose, because what were formerly emergencies are now accounted for and paid for by your sinking funds. The emergency fund now could be renamed something like “money to pay for normal monthly expenses if I lose my current source of income”, because all of those other categories of spending are already taken care of.

  72. Steve in W MA says:

    To Lauren, whose post inspired this post by Trent, I would say that the reason you want to spend the cash on DVDs is that you really don’t have a realistic sense of what you need to save for on a monthly basis. Starting a zero-based spending plan, where you allocate all your cash to all the different needs you will encounter over the year, will let you see a much more accurate picture of what you actually can afford on DVDs.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>