Do you know what you would do if you had an emergency tomorrow? I mean the type of emergencies you can’t plan for, like an unexpected car repair, a trip to the emergency room, or even losing your job.

For many, these kinds of events would cause absolute anxiety and a spiral of questions like:

Where will the money come from?

How will I pay my other bills?

Can I even afford this?

I’ve been there before and know firsthand what it’s like to fear unpredictable expenses. No one likes the stress that comes with a lack of money, especially if a large expense unexpectedly comes up. Financial strain is 0 out of 5 stars fun, and no one should have to endure it. But there is a simple solution to avoid all the unnecessary stress: having an emergency fund.

Is an Emergency Fund Necessary?

I cannot stress this enough: having an emergency fund is absolutely necessary and should be the number one priority when you are getting your financial sh*t together. If this term is new to you, an emergency fund is for those unexpected expenses and events. And no, buying a new outfit for a party you got invited to last minute doesn't count. It is quite literally a FUND for EMERGENCIES….an emergency fund. That makes sense, right?

Unexpected expenses and events include having to get your car fixed because you got into an accident, going to the emergency room because you fell off your bike and broke your collarbone, or losing your job but rent is still due tomorrow.

By maintaining an emergency fund, you’ll have a safety net to cover the damage to your car and the hospital bill or keep you afloat for the next few months while you look for a new job.

How Much Money Should You Have For an Emergency Fund?

How much money you keep in an emergency fund will depend on your specific situation. Experts recommend keeping enough money to cover 3-6 months' worth of expenses. Some people feel more comfortable with a year's expenses. Most probably don't need more than that, though—that's heading into cash hoarding territory.

How many months should you have, though?

Like I said, it depends on your situation. The more responsibilities in life you have (think: who all relies on you financially - kids, elderly parents, etc), the larger emergency fund you want to have. The fewer responsibilities you have (think: it’s just you in your apartment with no debt!), you can probably get away with a smaller one.

Another consideration is how easy it would be to get a job with similar pay. Easy peasy because your job is a dime a dozen? Great! You can prob have a smaller one. Or are you in a highly compensated role in a niche industry? Well…maybe you want a little bigger of a cushion.

Building An Emergency Fund

Setting up an emergency fund can seem like an overwhelming process, and you might not know where to start. Here are three easy steps to help you get started:

Step 1: Calculate Your Expenses for One month

First, figure out what one month of necessities looks like for you. Add up all of your bills, such as your mortgage or rent, any minimum debt payments (credit cards, car loans, student loans), insurance policies, cell phone, utilities, groceries, gas, etc. Once you figure out that number, that’s how much you need for a one-month emergency fund.

The key here is necessities, not things like concert tickets or unnecessary shopping. However, building a little cushion into your emergency fund isn't a bad idea. If you’re in a situation where you need to tap into your emergency fund, you likely won’t be getting manicures or doing happy hour with friends, but having some breathing room to do a little something like a morning coffee here and there while you get through your situation is ideal.

Step 2: Determine How Many Months You Need

Next, determine how many months of an emergency fund you need, depending on your job and responsibilities. The harder it is to find a new job with similar pay, the more months you’ll need to save. The same goes for your responsibilities. The more responsibilities you have, the more months you'll want to have secured.

Step 3: Start Saving Every Month

If you are just starting out, you’ll want to build your emergency fund into your budget, meaning you set aside $X every paycheck or every month for your emergency fund. A good idea is to set a goal for yourself, like having a fully funded emergency fund in six months or one year!

EXAMPLE: Your monthly expenses are $3,000/month and you decide you need three months of expenses for your emergency fund, which would be $9,000. You want to have a fully funded emergency fund in 12 months. You get paid bi-monthly from your current job.

$9,000 / 12 months = $750/month

Each month, you need to set aside $750 for your emergency fund. Since you get paid bi-monthly, you decide to set aside $375 every payday so you can hit your goal in 12 months.

If you’re like, Woah, Amanda…I can save like $20/month MAX. That’s okay! Make your first goal to save enough money to cover one month of expenses. The most important thing is that you build the habit of consistently contributing that regular amount to your emergency fund. Eventually, over time, you’ll have the emergency fund you need!

Need help calculating your emergency fund? I gotchu! You can download my Free Emergency Fund Calculator to help you figure out exactly how much money you need to have saved for a rainy day!

Where Do You Keep Your Emergency Fund?

The best place to keep your emergency fund is in a high-yield savings account (HYSA). A HYSA is like a regular savings account but on steroids. Instead of a traditional savings account where you are getting like 0.1% interest, a HYSA has interest rates varying from 2% - 5% (depending on inflation). I personally recommend having two HYSAs. One for your emergency fund and one for your sinking funds (other short-term and medium-term goals you are saving up for, like a wedding, a house, or even a girls’ trip to Tulum).

Wrapping Up 

Setting up and saving for an emergency savings fund can seem overwhelming, especially when you’re first getting your finances in order. 

But I’ve made everything super simple with my online Budgeting Course, which helps you create a budget and save more money. I walk you through how to budget your money to treat yourself from time to time while saving for your future and buffering yourself from the outcomes of an emergency!