How to Build an Emergency Fund

Everyone should have an emergency fund, do you know how to build an emergency fund or even how much you should have in it? An emergency fund is a financial contingency plan (safety net) for the unexpected future happenings which might knock into debt if you didn’t have any savings for it. Dave Ramsey recommends first saving £1000 ($1000) in your emergency fund as you are working on clearing debt then once debt is cleared then you can fully fund your emergency fund with between 3-6 months of your essential monthly expenses.

Emergency Funds are not thinks often taught in school but somehow everyone expects you to know how to build an emergency fund. I am sure you have heard your family members talking about stashing some money for a rainy day, this is basically what an emergency fund is for. Money you put aside for a ‘rainy emergency’ like a car breaking down, your home pipe busting and the like. It is very important to define and understand what an emergency fund is and what it isn’t because I think people have a different understanding of what counts an emergency.

Disclaimer – I am not a financial advisor.

How to Build an Emergency Fund

Before I can share with you how to build an emergency fund, we first need to understand and define an emergency and when you should use the money. If you lost your job and didn’t have other income sources, you would start dipping into your emergency to tied you over until you got a job and once you did, you need to re-fund your emergency pot. Being invited to a wedding at the last minute or a trip abroad with your girl friend’s is not an emergency that requires you to empty you expenses emergency fund.

Only you can define what an emergency is to you and what it isn’t, the worst thing is using your emergency fund for a holiday then tomorrow you truly have an emergency and have no choice but to borrow money and get yourself into debt. What is important is to also make sure that any time you use your emergency fund, you need to replenish whatever you use. Because I know it would be easy for me to raid my emergency fund, I have two other savings accounts that I use to (1) save for my holidays and (2) nothing-in-particular savings account that I often raid for unexpected but not an emergency items.

Now that we have defined what an emergency is and how important it is to refund it once used, it’s time to discuss how to fund an emergency fund.

Building an emergency fund is easy, what you need to know is how much you spend on your essential expenses and you would figure this out by having a budget. You can use my budget trackers which I sell in my Etsy shop to start you off on your financial journey to understand where you are spending your money. Your essential expenses are those that you need to live your life (not Netflix or Disney+), I call them fixed expenses like rent/Mortgage, gad/electric, water/internet etc.

Once you know what you fixed or essential expenses are, you then need to decide how much you want to keep in your emergency fund. As a single income household, I know that I need to save at least 6-months worth of essential expenses as if I lost that main source of income that’s it until I got another job. For those with more than one source of income, you can say 3-months worth of expenses but nothing says you couldn’t opt to save more than that. How you go about funding your financial safety net for the future is up to you but as recommended by the money guru, first start of with £1000 ($1000) or more depending on your preference then clear your debt.

I have shared thoughts on what I think is best between paying off debt and saving and is it something you can do at the same time. I personally chose to do both when I was in a position to actually do both but at one point in my life, I could only do one and that was paying off my debt and then when I had less debt, I started adding small amounts to my savings until I was completely debt free. There is no greater feeling than knowing you don’t own anyone any money and apart from your living expenses, all the money is left for you to spend on whatever you choose. I had never thought I would live a life where I didn’t have to make credit card or car payments every single month, but that’s exactly what I am doing now and I am grateful for it.

Remember, an emergency fund is there for you to spend when there is an actual emergency, wanting a new pair of shoes is not an emergency and neither is getting a manicure because it’s your own little treat. Create a budget that accommodates saving for your emergency fund and fun money to spend as you please and make sure your budget has a ‘miscellaneous’ section where you cups of Starbucks lattes can be attributed to. I share my budgets on this blog (Mar-2021) and on my YouTube channel is my real numbers for reference.