How to Start an Emergency Fund: 6 Tips

Years of soaring inflation and a cost of living crisis has greatly hindered many Americans' abilities to pay for general living expenses and put money aside in an emergency fund. According to Bankrate, this has left 36% of U.S. adults with more credit card debt than savings.^[1]

A Federal Reserve report on the Economic Well-Being of U.S. Households, updated in May 2024 also revealed that the percentage of U.S. adults who had three months of emergency savings set aside had fallen from 59% in 2021, to 54% in 2023.^[2]

LendingTree has published concerning figures that suggest almost half (49%) of U.S. citizens wouldn't be able to afford or pay for a $1,000 emergency out of savings or cash in their bank accounts. Many are instead relying on credit cards for unexpected expenses.^[3]

With challenging inflation, higher interest rates, and difficult living costs in general, it's always a good idea to start an emergency savings fund for the odd times when you may hit a financial rough patch. So, how do you start building an emergency fund for a rainy day? Let's get into it.

6 tips for kickstarting your emergency fund

An emergency fund is an essential financial safety net designed to shield you from sudden expenses, such as surprise medical bills, veterinary bills, broken household appliances, unexpected car repairs, or an unforeseen job loss. It just sits in your account and becomes a financial lifeline for when you really need it.

Starting an emergency fund is a great way to relieve financial stress, and stops you from relying on credit cards and other loans during difficult times. If you're just beginning to build your emergency fund, or you're wondering how to even start an emergency fund, the goal of saving enough money might seem daunting. This may be especially true if you live paycheck to paycheck and don't have a lot of money left over after you've paid your bills.

There are however many ways to quickly and effectively save up your emergency fund. Let's look through some of these ideas in more detail.

1. Create a realistic savings goal

Set a modest and achievable goal for yourself. This could be $500 or $5,000, depending on how much you think you can afford to put away every month. Also consider timelines and the deadline you're going to give yourself to reach your savings goal.

Don't make the target too large or overambitious, as this won't keep you motivated, and you're more likely to scrimp on putting cash aside. A good rule of thumb is to aim for three to six months’ worth of living expenses in your emergency fund. That way, if the worst should happen, such as a job loss, you're covered for some time while you get back on your feet.

For example, you could set a goal of saving $1,000 into an emergency fund in three months. This can help to provide a financial cushion for minor emergencies. You'd need to put away around $335 a month to get a little over $1,000 in three months.

Another technique is to save three months' worth of living expenses in a year. To do this, calculate your monthly living expenses and multiply by three. If your monthly expenses are $2,000 for example, aim to save $6,000 over 12 months, which means putting aside $500 per month.

Another approach is to take a percentage of your salary and any other income as soon as you receive it and drop it into a savings account. You'll need to be motivated to do this, but you could put anything between 5-25% of everything you earn each month into your emergency fund. You'll soon find that this adds up quickly over time. If you earn more or less over time, or your saving ability changes, you just adjust the percentage you put aside as you see fit.

Setting clear, achievable targets not only helps build your emergency fund, but also makes saving up a healthy habit. Adjust your goals in line with your financial situation and lifestyle. Remember, even saving up a small amount each month is better than having no emergency fund at all.

2. Cut back on non-essential spending

This is often the hardest step of them all – especially if you've been dreaming of a new car, a vacation or the latest technology. Cutting back on luxuries will however free up more money to put in an emergency fund.

Take a look through your outgoings every month – is there anything you can afford to live without? Look at any apps, magazines, streaming services or other entertainment you frequently pay for and subscribe to, and either downgrade them to a lower tier (with ads), or scrap them altogether to save money. A study on behalf of Self found that people spend an average of $32.84 per month on subscriptions they don’t use.

Eating out and coffee runs can also add up your expenses. Take a thermal flask with your own coffee to the office, and limit the number of times you eat out each week. Create a meal plan for the week, with notes for what you intend to buy for breakfast, lunch and dinner. Look in your cupboards before going shopping each week to see what you can already use for meals in your home. Prepare as many meals as you can at home, and stop ordering take-out or eating out.

If you're a keen shopper, it can be hard to say no to buying luxury items and treats. Avoid buying items on a whim. Consider whether you really need the item in question, even if it's on sale. Give yourself 24 hours of consideration time before making a purchase, and this might make you think twice before buying.

Finally, if you're paying a gym membership and you're not going as often as you should – cancel it and purchase cheaper equipment you can use at home. Do living room workouts, go for a hike around nearby trails, or purchase a bike and cycle rather than taking your car.

3. Set a savings challenge

Nothing feels more rewarding than reaching a savings goal. You can also set yourself a micro-reward for when you do reach that milestone (like a new pair of sneakers or a meal out to celebrate). It's important you reach your savings goal before you do this, though. If you've got a larger emergency savings goal in mind, setting mini-goals along the way can make things feel more achievable.

Try a challenge to save as much money as you can in one week. As you find more ways to save, you'll find the amount you can save will increase week to week. You could also challenge yourself to a number of 'no-spend days' per week – where you don't go out shopping, eat out or spend any money if you can help it.

4. Set up automatic transfers

Another option is to boost your savings by automatically contributing to your emergency fund. By setting up automatic monthly transfers from your main account to your emergency fund (ideally, as soon as your wages go in), you can avoid the temptation to spend the money elsewhere. Simply set up an automatic transfer to come out of your weekly or monthly salary into your emergency fund.

By automating your savings this way, you'll also become accustomed to living on a slightly lower income over time, which will also make you much stricter with yourself on how you spend the remaining money. This way of saving often leads to a larger emergency fund overall, and can help you achieve your savings goals quickly.

5. Open a high-yield savings accounts

If you're thinking of saving more than $1,000, it may be worth placing your money in a high-yield account to make your dollars work harder. Some high-yield accounts also place restrictions on the number of times you can withdraw funds, so you're less tempted to spend them. Instead of keeping your emergency fund in a traditional savings account, consider an account with a higher interest rate.

If you're unsure of which account works best for you, consult a financial advisor, or shop around to see what different banks and financial institutions are offering. As the money saved in the account earns interest at a higher rate, your emergency fund will grow more quickly.

6. Prioritize your debts

If you've accrued high-interest credit card or loan debts, consider paying those debts off first. Once you have a clean slate, this can lead to better opportunities for saving. Once your debt is cleared, try very hard not to overspend. Only purchase necessities, and steer clear of items that could deepen your debts.

How to start an emergency fund with no money

If you don't have much or any money left over from your pay packet to start saving for an emergency fund, there are things you can do to get money in your account quickly.

• Buy non-branded goods at the supermarket to save money
• Skip going out for lunch and discover cheap lunch ideas online
• Join a grocery rewards program to save on gas
• Unsubscribe from streaming services and other luxury purchases

Other ways to boost your income (so you have more money left over for an emergency fund), include:

• Ask your employer if you can work overtime
• Get a side hustle, such as delivering packages, food or doing freelance work
• Having a clear-out and selling items of value that you don't need or use

Bottom line

When you're thinking of starting an emergency fund, the most important thing is to be disciplined. As your savings start to accumulate, reserve them for genuine emergencies, such as an unexpected job loss, medical expenses, or vehicle breakdowns.

Avoid tapping into your savings for non-essential purchases like vacations or gadgets. Treating your emergency fund as a financial safety net is crucial – it protects you from potential financial crises, gives you peace of mind and empowers you to make decisions based on your needs rather than financial constraints.

Prioritize building your emergency fund quickly – whether that’s by cutting unnecessary expenses or boosting income, and aim to save enough to cover three to six months' worth of living expenses so that you're properly covered for the future.

Sources

1. Bankrate, “Emergency Savings Report 2024” https://www.bankrate.com/banking/savings/emergency-savings-report/
2. Federal Reserve, “Report on the Economic Wellbeing of U.S. Households” https://www.federalreserve.gov/consumerscommunities/sheddataviz/emergency-savings.html
3. LendingTree, “49% of Americans Can’t Afford a $1,000 Emergency” https://www.lendingtree.com/debt-consolidation/emergency-savings-survey/

About the author

Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.

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