Emergency savings. Building one can seem daunting for anyone living paycheck to paycheck.
When I was 27, I went to an outlet mall because I just felt like getting something new. I remember being pretty happy with the jeans and shoes I found. I also remember calculating in my head that payday was two days away, I had a full tank of gas, and my team was going out to lunch the next day – so lunch was covered. Which, in my mind, meant I technically had the money for it. And honestly, at the time, this reasoning didn’t feel wildly irresponsible.
At least, that was until I got into my car and discovered the car battery had died.
My immediate reflex was to grab my shopping bag, march back into the store, and return both items before I even called a towing company. This was a reality check I desperately needed: I had no business buying anything that day. I’d love to say I learned my lesson then, but I didn’t. I had experienced this before and would experience it again.
Flash forward to two years ago:
When I met my fiancé, he was appalled at how poorly I managed my money. Not only did I have debt, I could never get past the $2,000 mark in my savings account. Every time I got close to exceeding $2,000, something would happen: my dog would get sick, it was my family’s birthday season (so many Virgos!), or I had mindlessly shopped online and spent too much. I was in better shape than I was in my 20’s, but no doubt about it, I was still mismanaging my cash flow.
There are several times in my life I have made big decisions and changed habitual behavior. And having to share my current financial state with this individual I so respected and wanted to share my life with, was finally enough to push me over the edge and, in all honesty, financially “grow up.”
In this post, I’ll define emergency funds, discuss how much you should have in your emergency savings, and take a look at the steps I took to finally get out of debt and build a meaningful emergency fund.
Use the links below to navigate to the emergency fund topic you’re most interested in, or read through to follow my complete journey.
- What is an Emergency Fund & Why Are They Important?
- Building an Emergency Fund Step-by-Step
- Wrapping Up
What is an Emergency Fund & Why Are They Important?
Emergency fund definition: An emergency fund is a reserve of cash and/or liquid assets that you’ve set aside for emergency purposes only. A dead car battery, unexpected medical expenses, job loss, and home repairs are a few scenarios where an emergency fund might come in handy.
For the most part, your monthly budget probably covers things such as:
- Recurring fixed expenses: your rent, utilities, car payments, etc.
- Variable expenses: groceries, eating out, shopping, etc.
But chances are, your budget isn’t built to handle hundreds or thousands of dollars in surprise expenses. The fact of the matter is: life happens, and it’s best to be prepared.
How to find the right emergency fund amount
In general, experts recommend stowing at least $1,000 in your emergency fund. However, it’s important to note that not everyone’s financial circumstances are the same. If you have kids or other financial dependents (pets count!), you may want to bolster your emergency fund beyond $1,000.
If you are self-employed or depend on commission, you may want to save up more than the recommended amount as well. These sources of income tend to fluctuate more, so having a substantial safety net is always a good idea.
Building an Emergency Fund Step-by-Step
Now that you know what an emergency fund is and what your target savings might look like, let’s take a look at how you can build your own emergency savings fund. In this next section, I’ll go over some generic savings tips to help you establish an emergency fund, as well as share specific examples that worked for my situation.
Step One: Look for ways to save
At its core, building an emergency fund is really just saving intentionally. The only difference between starting a savings account and saving for an emergency fund is that you’re reserving the cash for one purpose only: emergencies.
When it comes to finding ways to save, a good place to start is with a budgeting calculator. By inputting your income and expenses, you’ll be able to clearly and immediately see how much or how little wiggle room you’re working with. From there, you can assess where and how much you need to cut back — maybe spending less on groceries is a good move for you, or perhaps limiting online shopping makes the most sense for saving.
For me, this meant getting a roommate. It’s no secret living in the Bay Area is expensive. Being in my 30’s, I prioritized having my own space and privacy above building emergency savings. Rent was taking up about 44% of my total take-home pay. If you know the 50/30/20 rule, that left about 6% for the rest of my essentials, which included car expenses, utilities, gas, and food (grocery store). Using a 50/30/20 budgeting calculator, I realized that my rent was just way too high, so I reduced it by sacrificing my space and sharing the cost with a roommate.
Step Two: Reduce your take-home pay and reallocate
“Wait, what?! You want me to reduce the amount of money I get every month??” – scariest realization ever. Why would I put myself in a position to have less cash every month when I already felt like I could barely make ends meet?
Simple: I was spending too much on non-essentials. I had the biggest cable package, an actual online shopping routine (morning flash deals along with my morning coffee), DoorDash deliveries, etc. Spending money was easy, it felt good (in the moment), and convenience was key.
In order to really buckle down and stop these spending behaviors, I HAD to reduce my take-home pay to force myself into better habits. I did this by investing in myself and my future:
- Make sure I was contributing the right amount to my 401K
- Max out my Employee Stock Purchase Plan
- Automate 20% of my savings to an account that was not the same bank as my checking account.
The first two of these are pretty specific to my situation. When it comes to determining where to put your emergency fund savings, take a look at the savings, budgeting, and debt repayment options available to you. Using a traditional savings account, high-yield savings, or investing can all serve as ways to start up an emergency savings.
Automating my savings was another phrase I heard repeatedly and never really listened to. But it is genius and for anyone open and willing to hear the message: automated savings is the best way to build your savings without ever having to take any action on your own. Now, I stipulated the account had to be at a completely different bank than my checking account. This was crucial for my own peace of mind that I was not going to start transferring money right back into my checking account (been there, done that!).
Step Three: Stick to it
As I mentioned, there have been a few times when I have really decided to change something habitual in my life, and a few times I thought I made that decision, but it didn’t stick. How do I mimic the first and not the second?
I got stubborn about it.
My mantras included:
- This is not a game.
- I’m not going to allow this type of behavior anymore.
- I will not carry any revolving credit card debt (this was after I paid it off).
Getting stubborn about not spending money can be more gratifying than you might think. You just have to see the gratification in a different light. In the morning, when I picked up my phone to start doing my online shopping, I would suddenly put it down and think, “NOPE. Not today!” And allowed myself to soak up the gratification of willpower. I also changed up my morning routine by journaling along with my morning coffee. This is not for everyone, and it didn’t stick forever with me, but at the time – it was exactly what I needed.
And of course, to make it easier on myself, I did do a few things to help ensure I stayed on course with this new behavior: I tracked my spending and budgets with Mint. I tend to check certain apps on my phone in the same order – FitBit, Instagram, Facebook. I just added Mint into this mix, so it was always on my mind.
I also deleted my credit card information from all of the shopping sites, unsubscribed from subscriptions, cut out cable, and only ate out on Friday nights – which was fun because it became something I looked forward to all week. There are tons of tips out there on ways you can make not spending easier for you. But you’ll never do them unless you drop the drama and just get stubborn about it.
Note: The steps I took may not directly apply to your situation, but the message is to be resourceful with what’s available to you, educate yourself on how to use it, and why you might need to make yourself uncomfortable in order to accomplish your goal.
Now, just because I got out of debt and started building an emergency fund did not mean life gave me a break and big expenses did not come up. It did become apparent my car was on its last leg, and I had to make that big decision. When it came time, I am proud to say I did not give in to my new-found sense of financial security and take on a huge monthly payment. I did a good amount of research, optimizing for a car’s affordability and value over its luxury and brand name, and found a car that suited my needs perfectly without the big brand name or monthly payment—another moment of great gratification.
As you work toward greater financial security, use these steps to start building an emergency fund of your own:
- Look for ways to save:
- Get a roommate
- Shop secondhand
- Use coupons
- Sell your stuff
- Reduce your take-home pay and reallocate
- Stick to it