How to create an emergency fund

I first learned about emergency savings when an auto mechanic told me how much it would cost to get my car running again.

The $1,000 repair cost wasn’t much less than what I paid for the car a year earlier, but I wasn’t ready to throw in the towel and send the car to the wrecking yard. I needed my car fixed as fast as possible so I could use it for work. 

Another problem was that the credit limit on my credit card wasn’t high enough to pay the repair bill. So I called the credit card company for the only card I had in my wallet and asked for an increase in my credit limit. I breathed a sigh of relief when I got it. My car was fixed a few days later. And I had a debt to pay.

I didn’t have an emergency fund at the time, but I quickly saw the need for one. Along with my immediate need to fix my car, I worried about what I’d do if another emergency popped up. My credit card balance was now high, and I still didn’t have savings to cover it or another crisis. I don’t know what I’d do if something else happened. It was time to start an emergency fund.

Here’s how I created an emergency fund and lowered my financial stress.

Start with a goal

After I paid off the credit card, my goal was to save $1,000. This wasn’t necessarily an easy goal, but it was one I thought I could accomplish over time, hopefully within a year. With $1,000 tucked away, I figured I’d have a good leg up on future emergencies.

After that, I wanted to build up three months of savings so I could still pay all of my bills if I ever lost my job. One of my college professors called this the “F-You Fund” because if you had this much in savings, you could say “Sayonara” to a bad boss and cover your expenses while you found another job. Money in the bank gives you the freedom to make choices like that. I didn’t plan on using it to say F-you to anyone, but the freedom sure felt nice.

Make affordable but regular contributions

Small, regular contributions seemed like the easiest way to start an emergency fund. For my budget, $50 per month was affordable. Still, that would only get me to $600 in a year, far less than my $1,000 goal.

After six months, I had saved $300. I decided to increase the monthly automatic transfer into my savings account to $100, which brought the emergency account up to $900 by the end of the year. 

I was getting closer. I remember feeling proud of myself. I was now on pace to save $1,200 a year for emergencies.

If $50 is too much for you to start with, try any amount that’s just a little uncomfortable for you. It shouldn’t be so uncomfortable that you can’t afford groceries this week. But make it enough that you feel it. Increase your contribution when you can.

Look for ways to save bigger

About a year later, after doubling my contributions to $100 each month and reaching my first goal (to save $1,000), my next step was to save three months of living expenses. That required some creativity.

I cut as many expenses as I could and increased my contributions even more—to $200 each month. I also saved most of any windfalls I’d get, such as tax refunds or raises. 

The idea was that I wouldn’t miss the money if it was never in my pocket to begin with. So a dollar raised became a dollar saved. I didn’t think I’d miss the money if it was stashed in a savings account. If it sat in my checking account, then it was likely to get spent on who knows what.

Covering emergencies

By doing this for most of my life, I’ve slowly built up and have regularly used my emergency fund to pay for life’s emergencies. 

Emergencies are usually unexpected. But one thing you can expect is that they’ll eventually happen in some form. And I’d rather be prepared for them with a little bit of financial pain spread out over months and years, than to be unable to deal with them quickly when they arrive.