Updated on 03.01.12

Automatically Build an Emergency Fund (60/365)

Trent Hamm

Whenever I’m asked for a single piece of financial advice for someone, I usually offer up “spend less than you earn.”

When they inevitably ask me for something more specific, I tell them “start an emergency fund and stick with it.”

An emergency fund is one of the best financial tools a person can have. It makes the ups and downs of day-to-day real life so much easier to get through. You’re essentially taking a bit of money from when times are good and putting it aside for when things aren’t quite going so smoothly.

Automatically Build an Emergency Fund (60/365)

The challenge with emergency funds is simply getting into the routine of putting money aside for it. I’ll be the first to admit that if I had to manually go to the bank each week and put some money into an emergency fund, I’d likely fail at it within a month.

Instead, I’ve used automatic transfers to keep my emergency fund full for years now. It’s such an easy technique to set up and it comes through for you in a big way when you really need it.

All you have to do is open a savings account at a bank somewhere, set up an automatic transfer between your checking and savings accounts, make sure that you’re not pushing your checking account balance down to zero with any regularity, and sit back and wait. Let’s look at the steps.

First, you need a savings account with which to hold your emergency fund. If you don’t have a savings account at your current bank, that’s certainly a possibility, but I found back in my bad spending days that having money in my savings account at the same bank is often a temptation. Thus, I suggest using an online bank like ING Direct for this.

Regardless of where your savings account is, you need to be sure that at least one of the banks offers the ability to easily set up an automatic transfer into or out of an account. You’re going to want to set up a transfer that moves $10 or $20 a week from your checking account into your savings account. A bank that accommodates this makes it very easy – a bank that doesn’t makes it nearly impossible. This is why it’s useful to choose a good bank for your emergency fund.

Once you have your account and the automatic transfer is set up, just be vaguely mindful of it. Don’t let your checking account balance get low enough so that the automatic transfer has any danger of causing you to overdraft. Aside from that, just forget about the emergency fund.

Then, when an actual emergency comes along – say, a car problem or a period of unemployment – you have a wad of cash on hand to handle that emergency. Just transfer the cash you need out of your emergency fund and take care of the issue.

If you’re putting in $20 a week, for example, you’ll have a little over $1,000 in your emergency fund at the end of the year. That’s plenty of cash to handle an unexpected car repair or take care of an unplanned medical bill.

Some people worry themselves about how big an emergency fund should be. I don’t think that’s really too much of a concern. Just set up the automatic transfer and forget about it, knowing only that after a few months, you’ll have a nice pot of money to help you with emergencies that’s constantly replenishing itself. It’s not only a mental relief, it’s also an incredibly useful financial tool.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. Johanna says:

    The pictures suggest that you should use the same five $20 bills that you’re saving for retirement to fund your emergency fund. So you’re saying that we should use a Roth IRA as an emergency fund, then?

  2. Icarus says:

    so should you have one big superfund or should you have a fund for emergencies, a fund for buying a new car, a fund for eventually replacing an appliance?

  3. valleycat1 says:

    I have set up the automatic sweep to the emergency fund (& other savings) from our banking account a couple of days after payday. Since I get paid once monthly, it’s easier for me to track one debit instead of a weekly amount. When I record the income, I go ahead and note the savings outgo as well. If I were being paid on a different schedule, I’d set up the sweep(s) to come soon after each payday. That way the rest of your budget comes out of the remaining money available, instead of having to keep vaguely in mind that you have another amount that will automatically disappear later on.

  4. BJD says:

    Right in line with what valleycat1 is saying, for people that already have a hard time savings it is much easier to make the automatic transfer at the time you get paid then to set up it weekly. If the money is sitting there you tend to spend it rather than remember you need it for the transfer next week.

  5. Misha says:

    Icarus @ #2: replacements of cars and appliances are not emergencies; they’re ultimately expected costs that you can anticipate, even if you can’t anticipate when they’ll happen. I vote for separate funds.

  6. Ruth says:

    #6 Icarus: I have funds for things that I know are going to happen (membership feeds, Christmas, appliance replacement, etc) accounted for in my monthly budget, but all of the money is stored in one savings account. Then I know how much is supposed to be allocated for each, without having 15 savings accounts.

  7. Ruth says:

    Oops, that last comment was addressed at #2, not #6, although #6 was another answer :)

  8. Steve says:

    @Johanna, all we know for sure is that one of the five is the same $20. The other ones could be different (unless you’re better at reading blurry serial #s than I).

    So, 20% of your emergency fund should be in a Roth.

  9. Troy says:

    Why is it always “spend less than you earn” and not “earn more than you spend”?

    A step further, if I earn $50K and spend $49,995 in a year, I am following your greatest financial advice. Yet I am getting nowhere?

    How does that work?

  10. Andrew says:

    Saving $1000 is commendable, but it won’t cover a lot of unplanned medical bills. In most cases, it won’t even cover a single visit to the emergency room.

    Even with insurance, something like a broken arm is likely to cost over $2000 out of pocket all told. No instance? Try $10000 and up.

  11. Andrew says:

    No “insurance,” not no “instance.”. Sorry!

  12. AnnJo says:

    I never saw this coming, but I’m starting to miss the photos of Trent’s dinner plates, drips and all.

  13. Annie says:

    @#10 – I was waiting for someone to say “earn more than you spend” glad you were thinking it. I agree with you and #11. 1000 emergency fund is not going to work for me. My monthly bills are way more than that and a 1000 would barely pay my mortgage. I am trying to build up an emergency savings of 20K or more. That way I am sure I can pay for my bills and have money left over if anything happens to me for 6 months to a year.

  14. Johanna says:

    @Steve #9: Good point.

  15. getagrip says:

    I appreciate the automated transfer mode, though I’m with another commenter that I prefer to have the transfers happen when I get paid. I find that even when faced with an emergency, because the fund is somewhat removed from my regular accounts, I’ll often manage to take money out of other sources (e.g. buffer in a checking account) and leave the fund alone or minimize the hit it takes. Over the years it’s been two steps forward and one back, which does add up over time.

    @#10 Troy While I like “earn more than you spend” I think most folks in financial pain (e.g. often those initially reaching out to people like Trent) can take quicker action in spending less right now, versus finding ways to earn more right now. Hence the “spend less” advice is generally the quicker action to get you a positive result, especially since most people quickly spend up and beyond any extra earnings they generate. So making more, unless it is a whole lot more, doesn’t change their situation until they get control over their spending.

  16. Kevin says:

    Again with the banner ad smack in the middle of the post.

    I know Trent has sold this blog and is now powerless to do anything, if anyone with any authority is reading this, please consider abandoning this practice. It’s very tawdry and smacks of desperation. It drastically reduces the professionalism and credibility of this blog.

    I know you want to make a return on your investment. I’m imploring you to find another way that is less intrusive, annoying, and destructive.

  17. DrFunZ says:

    Trent is writing about setting up an easy system to transfer a little bit of money each week. If you have your salary checks deposited directly into your checking or savings account, then is not in your hands to spend. If you cannot keep your hands off $5, $10 or $20 a week, then, trust me, you need WAY more than emergency fund!! You need counseling to cure your impulsivity.

    If you cannot afford to put away $5, $10 or $20 becasue your salary is really low, then try to trade a service and earn that money. Shovel snow or mow a lown, babysit a neightbor’s kid or tutor a fourth grader. Those jobs will give you a quick $5, $10, or $20 a week.

    Of course %1000 is not going to cover major medical expenses. But it can cover a quick trip to your doctor or get your pet’s foot bandaged or allow your child to go a field trip or pay for a new alternator on your car.

    Yikes. I cannot believe these comments. Do you people live to simply to criticize this blog? If cannot find anything valuable, then don’t read it.

  18. SMS says:

    #18. “Yikes. I cannot believe these comments. Do you people live to simply to criticize this blog? If cannot find anything valuable, then don’t read it.”

    I’m getting sick of this too. It detracts from the whole blog. I’m not here to find fault or correct any perceived mistakes. I’m here to take what I can use and leave the rest.

  19. SMS says:

    Does anyone enforce this?

    “Constructive comments of all kinds are welcome. Negativity is not.
    If you’re going to criticize the statements of others, supply supporting information that backs up your statement or your comment will be deleted.
    Comments that don’t contribute to the growth and thoughtfulness of other readers will be deleted.”

  20. Christine says:

    I agree with comments 18, 19 and 20. Trent, why don’t you just block these people? They are just here to spread nastiness, and I don’t see why it is allowed to continue. When I read the comments from archive posts a few years back they are from people genuinely interested in the topics presented and eager to add something of value. Now it is this relentless nitpickIng and negativity.

  21. Angie says:

    I agree with #’s 18, 19 and 20. It is so irritating to come to the comments for some thoughtful conversation and see the same group of people c.r.i.t.i.c.i.z.i.n.g. time after time after time after time after time ad nauseum.

    Like I said the other day, your complaints are getting old. Just shut it already!

  22. Evita says:

    #20 No, Trent does not read the comments.

  23. Johanna says:

    Angie (and others), please, take your own advice. It seems like some of you do nothing but complain about how much you hate critical comments. We get it. Maybe it’s time to move on.

  24. Angie says:

    ACTUALLY Johanna when y’all stop I will, too.

  25. Angie says:

    And also, FYI., I say something a FRACTION of the time compared to how often I read P.E.T.T.Y. A.S.S. COMPLAINTS.!

    freaking trolllllllls.

  26. Steve says:

    The reason I still read the comments is for the negativity. Johanna, David, etc are TBH, putting more effort into this blog and writing better stuff than Trent is nowadays.

  27. Johanna says:

    Angie, I actually don’t really care whether you stop or not. I just wanted to point out what an enormous hypocrite you’re being.

  28. Riki says:

    Actually, Johanna is the exact opposite of a troll.

    She generally writes well-reasoned, intelligent comments that add to the conversation and often correct inaccuracies in Trent’s posts.

    Why, oh why do people equate disagreement with trolling? I don’t get it. The world is not an echo-chamber of agreement and neither is the internet. If you can’t take the good with the bad, it’s time to grow up.

  29. BD says:

    @Steve: Yep, that’s why I come here. Johanna is straight-up negativity entertainment. It’s always fascinating to see how low she’ll go.

  30. Kai says:

    This is supposed to be a minimum emergency fund – something that can help you out with an unexpected car repair, or something similarly little. this would help the people who write in and say that their budget was blown to hell because of a very minor thing.

    Obviously it’s also valuable to save a much bigger amount (x month’s expenses) to prepare for bigger emergencies like a period of unemployment or unexpected noninsured medical problems or the like.

    I guess my point is that the concept isn’t bad just because it’s poorly explained here..

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