Emergencies, accidents and unforeseen events happen when we least expect them. From unexpected health expenses to sudden but necessary car and home repairs—not to mention possible job loss (can you say COVID-19?)—an emergency fund serves as a safety net for rough times and can help to ease the financial burden that comes along with them. That’s why you should try to stash away three to six months’—or more—of basic living expenses, just in case.1
Yet, fully 25% of Americans have no emergency savings in place at all.2 Some people don’t know how to save, others don’t recognize they need to be saving now, and many simply feel they can’t afford it. But even if you fall into one (or more) of those groups, we’ll break things down, show you how to begin to save, and offer tips to help make that emergency fund grow, starting with some great news: It can be easier than you think.
1. Pay down your debt
The first step in helping to accumulate an emergency fund is to start paying down your existing debt. Wiping away debt could leave more money in your pocket to save.
The dilemma: Your debt has a high interest rate but your savings account has a very low interest rate, leaving you with a net loss.
Consider: If you have $500 a month earmarked to pay down debt, use $250 of your available funds toward your highest-interest debt (most likely credit cards), then send the other half into an emergency account. Continue doing that until you pay off the card or loan, then move on to the next highest-interest debt, and so on.
2. A penny saved is a penny earned
If you can put off splurging on large purchases (think wants versus needs) and reduce discretionary spending, you can start channeling that money into your emergency fund.
Also, become a smarter consumer. Make a habit of using cash-back cards, promo codes and rebates from one of the many sites that give you money back for shopping at thousands of retailers, online and off. Typically all you have to do is go through the rebate site first—but these days many offer free browser extensions that do the discounting automatically as you shop. Also, most major credit card companies offer cards with a cash-back option on qualifying charges. Even a dollar saved here and there could add up to significant amounts over time.
3. Pay it along with your bills
Just as you have bills that have to be paid at the same time every month—mortgage or rent, utilities, loans—consider putting aside money for your emergency fund every month. If you think of your emergency fund as a bill to be paid each month, it could be easier to incorporate it into your budget and spending plan.
It may sound counterintuitive, but research shows3 that one of the best ways to become a better saver is to stop thinking about it; put your savings plan on autopilot: with 24/7 online banking capabilities, you can set up automatic, recurring monthly transfers to your emergency fund. For example, if you get paid on the 15th of the month, set up a continuous monthly transfer for that day so that you never see the money in your checking account (and won’t be tempted to spend it).
Beyond emergencies, this is also great way to approach any savings account goal, from your workplace retirement plan to your vacation fund.
4. Bonus points
If you’ve received a cash windfall, whether through an inheritance, bonus or tax refund, make sure to consider directing a portion of it to your emergency fund.
For instance, if you get a hefty tax refund, do your best to simply deposit the check—or at least 25% of it—into your emergency account. The feelings of security and satisfaction you'll get from a fully funded safety net are far greater than the short-lived thrill of buying a couple of new iPads or a trip to Turks and Caicos, however tempting (especially these days).
5. Build your emergency fund slowly
A bit of unconventional advice: Don’t rush. Build your emergency fund slowly over time. Don't overfund the account only to repeatedly remove money for monthly expenses. Putting that cash away (no matter how small each deposit) and not touching it is one of the best ways to be sure it continues to grow.
Even so, for best results, avoid scrimping and saving so much that you start to feel deprived. If you never let yourself enjoy an evening out or the occasional clothing splurge, your plan might backfire. Just as many athletes eat a weekly cheat meal to stay focused, we all need incentives to stay the course. Leave room for occasional indulgences.