Emergencies — we don’t want to think about them, but life doesn’t always follow our plans. One of the most important ways to protect yourself financially is to build an emergency fund. 

While you may be able to take out a loan or use a credit card in a pinch, cash savings help you cover your expenses during an emergency — even an extended one — without digging yourself into a hole. 

This post will show you how to build one — with tips to make it easier than it might look.

What is an emergency fund?

An emergency fund is money that you set aside to live on if you ever need to and that you can get to easily during a crisis. Use it as your first line of defense after a medical emergency, a lost job, cut hours, or any crisis that affects your finances. 

Unlike retirement funds, the goal here isn’t to grow your money through long-term investments. Instead, you want to keep your emergency fund in a secure, short-term account, such as a savings account — one that lets you grab your cash when you need it and that won’t drop in value based on changes in the stock market.

How to build your emergency fund (and how much you’ll need)

Like many long-term financial goals, the best way to build an emergency fund is to break it down into simple questions and steps. These four cover everything you need.

1. Set your goal: figuring out how much to save

The general guidance is to build up at least three to six months’ worth of your expenses — which means you’ll need to figure out how much that is.

Start by listing out your all your necessary expenses. If you aren’t using an app like Quicken Simplifi that lets you see them all in one place, you’ll need to work them out by hand. Let’s break it down even more to help you find them all: 

  • Fixed expenses: These are the necessary bills that don’t change from month to month. Think rent or mortgage payments, loan payments, insurance, your phone bill, and child care as a few examples.
  • Necessary variable expenses: These are the things you need that you have more control over each month — if you use less (or bargain shop), you can spend less. Think food, your electric bill, gas for your car, personal care, and clothing. Estimate a realistic monthly amount for each one.
  • Infrequent expenses: These are the expenses we tend to forget about because they only pop up once every few months or even once a year — your annual vehicle registration, non-monthly insurance payments, annual subscriptions, and so on. For annual bills, divide by 12 to figure out what you need per month.

Strictly speaking, some expenses might not be necessary, but be realistic about what you’ll need during an emergency. Things like looking professional at work (or when you’re interviewing) matters. 

After you’ve filled out your list, add up all your monthly expenses and multiply the result by three, and then by six. Aim to build up an emergency fund amount that falls somewhere in that range. 

If your total goal feels completely out of reach, don’t worry — keep reading. Every emergency fund starts out that way. The trick is to make your first goal smaller and build up to it. 

2. Saving your first $1,000 

Building a full emergency fund takes time, especially if you’re living paycheck to paycheck. A lot of people are these days! To stay motivated, start with an easier goal of $500 or $1,000 — enough to get through common setbacks. 

Add that first emergency fund goal to your budgeting app — or add it to your spreadsheet if you’re managing your money by hand. The important thing is to track your progress to help you stay focused.

Next, look for ways to save more money or bring more money in. Both are great ways to make more progress on your goal.

Remember, making extra money can sometimes be easier than cutting back. Whether you can take on extra hours, find a new contract job, or get going on a new side hustle, that extra push can help you reach your goal faster. 

3. Building your full emergency fund

It takes time and persistence to save up a full emergency fund. And, of course, a sudden emergency can drain your funds — forcing you to start all over again! While that can be frustrating, it also serves as a reminder as to why your emergency fund is so important. 

If you’re carrying a lot of credit card debt, one thing that can help is to pay that debt down first. The more you pay it down, the more you can use those cards again if you really need to — just remember not to close them. And once you pay them off, you’ll have more money each month to put toward your savings.

Another thing that can help is to prioritize your savings. Instead of adding to your emergency fund after you do everything else, start putting that money away first — even before you pay your bills if you can. 

Having trouble balancing your bills and savings? Quicken Simplifi can help.

4. Where to keep your emergency fund

As you start to save, setting up a separate savings account can be a good idea, so your emergency fund doesn’t get mixed in with the money you’re spending every month. 

While you’re at it, look for an account with a high interest rate. Online savings accounts, high-yield accounts from credit unions, and money market accounts tend to offer higher rates than traditional checking and savings accounts. 

Compare your options to find one with no fees and good rates. Every little bit helps!

The key to building your emergency savings

If you want to build an emergency fund, the most important thing is to get in the habit of saving. Once you make it a habit, you’ll start saving even more every time you get some extra cash — like a bonus at work or a great tax refund.

Not sure how much to save? One option is to go by the 50/30/20 rule — using 20% of your monthly income to pay down debt or grow your savings. 

What’s easier, though, is to get a spending plan that’s uniquely tailored to your specific needs — one that includes your savings, covers your bills, and makes it easy to spend the rest however you want to without breaking your budget.   

That’s exactly how we built Quicken Simplifi — to do all that automatically. Learn more about the Quicken Simplifi app here.