Protecting Your Privacy: We will never call or email you asking for money. There is no fee to apply. Close

16 Steps To Filling Up Your Emergency Fund

Unexpected emergencies can spike your anxiety levels like nothing else, but it's the aftermath of the emergency that wreaks the most havoc on your mental state.

The American Psychological Association reports that 54% of Americans stress out over handling unexpected expenses. Another survey reveals that 44% of those seeking debt help have been prescribed medication to help them cope.

With our emotional, physical (stress can ruin your body!), and mental health at stake, we should all be rushing to save for the next unexpected personal crisis that hits.

Yet most of us aren't saving much at all. A Federal Reserve survey on the economic well-being of U.S. households sounds all sorts of related alarms:

  • Only 39% have a rainy day fund adequate to cover three months of expenses.
  • Only 48% say they could afford an emergency expense costing $400 without having to sell something or borrow money.

So what's stopping us from setting aside some emergency money to deal with life's nasty surprises?

Most of us unrealistically believe that some way, somehow, our current income will be enough to handle whatever the future brings.

We don't create an emergency fund because, despite all the evidence, we just can't bring ourselves to think the emergency will happen to us. But the reality is, we must start saving if we want to be ready for that future emergency.

Even more than being ready for the future is our desire to be happy and relationally stable now. In an in-depth article about Americans' lack of emergency funds, financial psychologist Brad Klontz said, "Financial insecurity is associated with depression, anxiety, and a loss of personal control that leads to marital difficulties."

That's right—a lack of savings can lead to all sorts of downward spirals, and even affect your marriage.

financial insecurity quote

If lacking emergency money leads to anxiety (and worse), then it's also true that having an emergency fund can give us some peace.

american families fluctuating wealth

Financial "Peace" University is actually the name of the financial planning class created by Dave Ramsey, one of the most popular proponents of having an emergency fund. Experts like Ramsey advise that building up rainy day savings can bring us some much-needed tranquility in the midst of life's inevitable financial storms.

There is very real hope for achieving this kind of financial peace—countless others have walked this road to building savings, and many more are just getting started.

These savers keep their eyes on the prize—a savings cushion worth at least three months of expenses that will bring them some security when unexpected life emergencies happen.

And yes, we know... Many of us have tried to save for emergencies, and failed. But with clear goals, a step-by-step plan, and some accountability or coaching, this time it will be different.

Filling an emergency fund is not only necessary—it's possible!

It's time to face the facts, folks—life gives you lemons, and you need an emergency fund to make lemonade. The task of creating and filling an emergency fund is challenging, but following these steps - or even just getting started with one- will get you through the process.

Looking for something particular to help you fill your emergency fund?

Whether you're just starting, or looking for new ideas, we've got you covered. We even made a short cheatsheet!

  1. What exactly is and isn't an emergency fund?
  2. Prevent nasty surprises by knowing how much you need in emergency money
  3. Store your emergency fund in an accessible savings account
  4. Create a detailed budget that can protect you in emergency situations
  5. Trim the fat—cut out non-essential expenses to discover "found" money
  6. Pay your emergency fund like a regular monthly bill
  7. Make your excess baggage work for you—sell it!
  8. Use unexpected money to grow your emergency fund
  9. Make a profit off your hobbies and/or doing other people's chores
  10. Spare some change—round up your purchases and put the change in savings
  11. Guard your emergency fund like your life depends on it—because it might
  12. Pay off high-interest debts with emergency savings over $1,000
  13. Do not use your emergency fund to pay off low-interest debt like student loans
  14. Use apps and online tools to help meet your rainy day savings goal
  15. Take a class to better build your emergency fund
  16. Consult a financial planner

1. What exactly is and isn't an emergency fund?

Before you get started on this quest for personal peace via an emergency fund, you need to know what an emergency fund is—and isn't.

If you don't define it, your "emergency fund" may be just a random stash of cash that you end up using to pay the babysitter.

emergency costs vs days of work

According to those in-the-know at Investopedia, "An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense."

It's also known to many as a "rainy day fund," which originally was a term used for state money that was saved to help handle the years when the state couldn't bring in enough revenue.

An emergency fund is:

  • Money that you set aside in a separate savings account
  • For emergency use only—for unexpected, urgent, necessary expenses

It can be tricky to decide whether or not something is a true emergency.

The best way to think of your emergency fund is to ask yourself:

  • What will happen to you and your family if you suddenly lose your job or income?
  • Will you have enough money ready to help you pay rent and eat while find new income?

A true emergency must present ALL of these characteristics:

  • It is urgent. It has to be dealt with immediately, or else serious financial, medical, or life consequences will happen. It cannot wait.
  • It is necessary. There is no way around spending for this problem. There are no other solutions.
  • It is unexpected. If it might occur with any kind of regularity, include it in your normal budget instead of considering it an emergency when it happens.

An emergency fund is not:

  • A specific kind of bank account—banks don't offer accounts called "emergency savings funds," although putting your emergency money in a separate, regular savings account is often the best way to store it. ("Out of sight, out of mind...")
  • To be used for expenses that are not absolutely urgent and necessary.

Examples of when to use an emergency fund:

  • You lose your job and need cash to cover the rent
  • You or a loved one suddenly requires medical care (OR dental care)
  • Your car breaks down and you don't have public transportation/car pooling
  • Your house needs an urgent repair i.e. a pipe springs a leaks
  • Your pet suddenly needs medical care
  • You have to attend a funeral or travel unexpectedly
  • You are unexpectedly pregnant

Touching your emergency fund when you don't have to is a common mistake. Skip ahead to #11, " Guard your emergency fund like your life depends on it—because it might" to learn how you can outsmart yourself.

childbirth costs

Before you get started with your emergency fund, pay off your high-interest credit card debt.

If you have some hefty credit card debt, then you should replace the words "emergency fund" in this article with "paying off debt." Instead of setting aside money for later, use that money to pay off those nasty high-interest loans first. Once you're finished paying these expensive loans, re-start the savings process to fill your emergency fund. Check out, our tip #12,"Pay off high-interest debts with emergency savings over $1,000."

Knowing that a financial emergency is only an event that is unexpected, urgent, and necessary gives you a better chance of maintaining your emergency fund for when it's most needed.

2. Prevent nasty surprises by knowing how much you need in emergency money

Everyone needs a different amount of money in his or her emergency fund—there is no one size fits all here amount.

Your single friend, Mike, who's held his stable job as a radiologist for six years, may only need $2,000 in his emergency fund savings account.

He's not likely to lose his job, and his income has also allowed him to invest in stocks and mutual funds that he can tap if he encounters a financial emergency.

His emergency fund would cover an unexpected car repair or rent for two months in his studio apartment.

If you have a super solid job, there are exceptions to the savings rule.

In an article debating the need for emergency funds, personal finance writer Vanessa Page notes that some high-earning, financially savvy investors like Mike may not benefit from having a hefty emergency fund.

Page says, "In a world with readily available credit and investments that can be liquidated within days, there is no need to keep thousands of dollars tied up just in case of a job loss or an emergency."

credit and investments quote

But for those of us with less earnings and investments, a strong emergency fund is an important lifeline.

For example, your other friend, Andrea, just got a job last year as a music teacher at a new local private school. She's also a single mom of two teens living in a 3-bedroom apartment. Andrea doesn't feel secure unless she's got at least $10,000 in her emergency fund—enough to last her three months if her job falls victim to budget cuts.

When Andrea found out that the school's trustee board cut the arts budget—and her job—she used her emergency fund as a safety net while she looked for a new position.

Three months later, she started a new job, earning 10% more at a bigger school. Her emergency fund got her through unemployment with $1,500 to spare, and she'll use the extra 10% of her salary to rebuild the fund for the next "rainy day."

So, how much should you save in your emergency fund?

There are a lot of theories around how much you should actually save for emergencies. Dave Ramsey recommends starting to build a $1,000 emergency fund first, and then working on a larger emergency fund after you've paid off debts.

The Vanguard Group, one of the world's largest investment management companies, says, "Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months' worth of living expenses."

The recommendation to save 3-6 months worth of spending means that your savings goal for your emergency fund depends on your life costs.

To determine how much money you should store up in your emergency fund:

  1. Add up a list of your essential monthly expenses (see #4 for more about budgeting)
  2. Multiply your essential monthly expenses by 3 (or by 4, 5—or 6, to be extra secure)

Your essential monthly expenses x 3 = your emergency fund amount

essential monthly expenses

Now that you have a goal amount—3 to 6 months' worth of essential expenses—read on for how to set up, grow, and use the emergency fund.

3. Store your emergency fund in an accessible savings account

With so many types of savings accounts, mutual funds, and investments out there, many people wonder where to put their emergency fund. If your $1,000 emergency fund can earn $100 a month in stocks, then why shouldn't you keep it invested in the market? The high returns promised by high-risk investments can bring out the starry-eyed gambler in all of us.

But an emergency fund needs to be your most secure form of savings.

The cash you save needs to be "liquid." You must be able to access it quickly.

To decide where to set up your emergency savings so they are liquid, check out these characteristics of a good emergency fund:

What is and isn't "liquid" cash

types of liquid assets

Courtesy of  SimpleDollar

It needs to have "low volatility." In other words, the value of the item shouldn't vary much on a day-to-day basis. Precious metals and real estate have high volatility—they may be worth up to 30% less than you paid depending on the market.

It needs to be insured. Cash stuffed in a mattress, while it is accessible, is also easily burned in a fire.

An FDIC-insured savings account, which guarantees your deposits up to $250,000 per depositor per bank, means that your emergency fund will be safe despite personal or bank catastrophes.

Based on these recommendations, you should store your emergency savings in an easily accessible savings account. An added bonus to using a savings account is that your cash is out of sight, out of mind.27

The financial services and investment firm, Vanguard, advises keeping money for your emergency fund out of your immediate reach.

This means you can't spend it on a whim, no matter how much you'd like to. And by putting it in a separate account, you'll know exactly how much you have—and how much you may still need to save.

To store your emergency savings:

  • Check your local banks or online banks to open a savings account.
  • Many banks enable you with their mobile app to take a picture of a check and have it automatically be deposited to a savings account.
  • Ask the bank for instructions on how to set up getting a portion of your paycheck automatically deposited into your savings account.
  • Make sure you can remove your funds quickly via electronic transfer to checking or direct withdrawal. But, avoid making withdrawal too easy—stay away from debit cards.
  • For extra value, look for an account that has a financial reward for certain amounts of initial deposits or balances—then try to meet and maintain that balance.

4. Create a detailed budget that can protect you in emergency situations

In order to figure out how much you can contribute monthly to your emergency fund in your designated savings account, you need to plan for every expense that you can possibly expect to have. Remember, your emergency fund is only for unforeseen expenses.

costs of death

There are many ways and strategies to create a budget. Because you need a budget in order to know how much money to set aside, we've shared the basics on how to create one below.

Determine your monthly expenses by looking at the past 3 months of spending.

Why 3 months? Research suggests we need at least 3 months to bounce back from a financial setback, like losing a job.

If it costs you $4,000 to eat and live each month based on the last three months of expenses, then you'll want your emergency fund to have at least, $12,000 set aside as an emergency fund.

Here's how to figure out your expenses:

  • Gather your past 3 months of financial info:
  • —Bank statements
  • —Credit card statements
  • —Cash receipts
  • Divide your expenses into general categories:
  • Debts: mortgage/rent; credit cards; home equity loans, car loans, student loans
  • Utilities: gas/oil, electricity, phone, water/sewer
  • Insurance: Health, auto, life, home, long term care
  • Savings and investments: retirement, college savings
  • Life expenses (adjustable, but somewhat inevitable): Groceries, toiletries, gas and automobile maintenance, commuting, child care, clothing, personal care (haircuts, manicures/pedicures, gym memberships, etc.), home maintenance, out-of-pocket medical expenses (medications, co-pays, etc.)
  • Miscellaneous: vacation, entertainment, dining, gifts, charitable donations

figure out expenses

Once you've written down or entered all your categorized expenses, add up each category and divide by 3 to find your average monthly expenses. Note every little income or expense—no secrets.

Use a free budget calculator to help you categorize and make sense of your expenses.

To make sure you don't miss listing an easily forgotten expense or source of income, use a budget calculator to help you create a realistic budget. There are several budgeting guides catered to people in different phases and walks of life, so choose the one that fits you best. Kiplinger's household budget worksheet is a budgeting tool that includes a broad range of expense categories.

Popular online budgeting tools are:

  1. Creditloan Budgeting Tool
  2. Mint
  3. EveryDollar
  4. You Need a Budget

popular online budgeting tools

light bulb tip

Tip: Look at your past credit card, bank statements, and receipts to find out what you usually spend on expenses that aren't set in stone, like food and entertainment. Once you detail your monthly expenses and your irregular expenses like clothing, gifts, oil changes, and haircuts, think about expenses that only come up once or twice a year.

Don't use your emergency fund to pay for annual expenses you know are coming.

Forgetting to buy Christmas presents, set aside money for taxes, or one-time annual fees (that you know you'll have to pay in advance) don't count as "unexpected," and therefore shouldn't sap your emergency fund.

Don't worry about not having 100% of the money you know you'll need later, says the online budgeting site, EveryDollar.

To help you budget for sporadic expenses like annual taxes, EveryDollar offers this advice:

Create ...a monthly fund for each irregular expense.

That way you can break the cost down into smaller bites throughout the year.

For example, let's say you owe $200 [for condo fees] at the beginning of the year.

You could start budgeting $67 a month for it in November to soften the blow in January.

Another suggestion by Abby Hayes, a writer at Dough Roller and US Money News says figure out the total amount of your annual expenses and then, "just divide the total expense by 12, and set aside 1/12 of the overall payment each month."

annual expenses amount

You can park the money that you set aside in your checking account OR your saving account, just know how much you need for annual expenses versus your emergency fund. Then you can always keep track of the total amount for each category.

If you needed $2,500 to cover annual expenses like one-time insurance payments, and $5,000 to fuel your emergency fund, for example, then your saving account should have $7,500 sitting inside.

Creating a detailed monthly budget on which to base your emergency savings plan is all about making the proper determinations—from your income to your expenses and everything in between.

car repair expenses by state

5. Trim the fat—cut out non-essential expenses to discover "found" money

The easiest way to build up your emergency fund is to cut down on spending and then stash that money away. Just like cutting extra calories when you're on a diet, you'll need to stay motivated if you want to stick with the program.

Even if you already follow a monthly budget, you'll need to figure out which of your monthly expenses are essential, and which ones you could let go if needed.

According to Vanguard, essential expenses include:

  • Housing
  • Food
  • Health care (including insurance)
  • Utilities
  • Transportation
  • Personal expenses
  • Debt

Non-essentials include:

  • Entertainment
  • Dining out
  • Nonessential shopping
  • Vacations
  • Savings for a second home, college, or other goals

essential vs non essential expenses

To go on a spending diet, cut out paying for non-essential items and services. Then continuously fill up your emergency fund with the money you're saving on your spending diet.Don't let the money you've saved sit around and tempt you. Banks are happy to give you the tools to make depositing money in your account easy.

For example, if you need to save $1,000, then you'll need to cut $100 of expenses ("cash calories," if you will) each month for 10 months to reach your goal. Instead, you'd put that $100 into a savings account earmarked "emergency."

Yes, that means you will have to adopt a frugal lifestyle for a period of time to meet your goals. But as with anything that's worth having (and this one is literal), it'll be worth it.

Because can you really put a price on peace of mind?

Want a nifty feel good trick?

Write a check to yourself and deposit the amount in your savings account. The money will move from your checking account to your savings account.

This may seem old fashioned, especially if you are comfortable banking online, but it's an easy way to save and you get to "pay" yourself.

cost of saving your life

6. Pay your emergency fund like a regular monthly bill

After you've decided how much you can afford to put toward your emergency savings each month, find a way to make those payments like clockwork.

Think you just don't have any extra money to put toward savings? Think again! We bet if you looked over your credit card and bank statements, you'd find lots and lots (lots!) of unnecessary expenses. Add even half of those up, and you'll have yourself a nice start to that emergency fund you've been coveting.

Not sure how (or where) to start? Heed the advice of personal finance guru Suze Orman:

cutting bill expenses

Once you've found some extra cash, start making regular deposits in your emergency fund until it's full:

  • Deposit the same amount at the same time every month.
  • At work, set up a portion of your paycheck to be directly deposited into your emergency savings account.
  • If your employer won't split your paycheck for you, set up an automatic monthly transfer from your checking account into the emergency savings account.
  • Do not skip paying your emergency fund.

7. Make your excess baggage work for you—sell it!

Besides tightening our belt and saving for a few months to build up an emergency fund, we could also consider earning some extra money.

Almost all of us own things we could sell to get cash for an emergency fund—and we're not talking about pawning your wedding ring.

Americans own so much stuff that we have to keep some of it outside our homes. BecomingMinimalist notes that one out of every 10 Americans rents offsite storage—"the fastest growing segment of the commercial real estate industry over the past four decades." We actually pay rent for our stuff!

The Internet is filled with stories of people making thousands of dollars by decluttering and selling their used clothing, toys, and other belongings online. One blogger details how he made $2,145 in one month by purging his apartment and selling stuff on eBay, Craigslist, and BookScouter.

If you don't use it, love it, or need it, consider selling it to jumpstart your emergency fund. If you're not sure which of your items is worth selling, start with these top 5 most profitable things to sell on Amazon or eBay, courtesy of BitBond:

  1. Books
  2. Video Games
  3. Electronic Tablets
  4. Legos
  5. Bicycles

And remember—eBay and Craigslist aren't the only gigs in (Internet) town. Some other online selling sites to consider:

websites to make extra cash

You can also make some money by renting out a room or your whole home when you're not around. If you're going camping for the weekend, you could pull in several hundred dollars by listing your house on Airbnb. Did you know that a one-week private room rental in the country town of Staunton, Virginia could bring in as much as $725?

So, plan to visit family or friends while making money in your sleep.

8. Use unexpected money to grow your emergency fund

Sometimes, life throws you a bone—an unexpected bonus at work, a $20 bill strewn on the sidewalk, or winnings from that scratch-off lottery ticket you bought on a whim.

Most people spend these bonuses right away—53% of consumers in a recent consumer research survey by Georgetown said they would use an end-of-year bonus or unexpected gain to make a purchase.

But temporary retail therapy does not offer the kind of long-term peace you're aiming at with an emergency fund.

Jenny and Bart's emergency fund, for example, needs to be $12,000. They are depositing $200 into it every month, so it will take five years to fill it. Every year during the holidays, however, Bart's company gives him a $1,000 bonus. In the past, Jenny and Bart have used this bonus as their date night restaurant fund, blowing $80 more a month on a great meal with a view.

But, if they were to put the $1,000 directly into their emergency fund for just 3 years, they would cut 15 months off the time it takes to fill the fund—that means 15 less months of tight budgeting for the sake of building their emergency savings.

So, instead of five years of living on a tighter budget, they could do less than 4 years on that budget. In the last 15 months of their original five-year savings plan, they'd have the peace of mind of an emergency fund, and $200 a month to invest, eat out, travel, or otherwise enjoy.

These boosts will help you reach your goal of a fully funded emergency savings account much sooner:

  • Tax refunds
  • End of year bonuses
  • Prize money
  • Gifts

emergency fund sources

So, put on some blinders and charge ahead—depositing any unexpected income into your emergency fund—without ever looking back!

9. Make a profit off your hobbies and/or doing other people's chores

Most of us have hobbies that could bring in some extra cash. Massively popular sites like Etsy are devoted to people who have decided that their homemade crafts are worth a pretty penny. With just a little bit of prep time, you can set up a "shop" to sell your crafts.

The Penny Hoarder, a website for ideas on how to earn extra income and save, offered a success story: Recently a couple from Hawaii became a hit on Etsy with their kitten-shaped crayons. The couple's store "Kitty Baby Love" was featured on the homepage of Etsy and the couple went from selling a few items a day to over 1,000 orders in the month following the feature. The average item in their store is priced at $15, meaning the couple sold over $15,000 in merchandise in 30 days. Talk about life changing!

extra cash on etsy

Check out these top money-making hobbies, gleaned from Good Financial Cents:

  • Photography: Do entry-level freelancing at friends' events or sell your work on websites like SmugMugPro or iStockPhotos.
  • Writing: Freelancing, blogging, editing, and proofreading can all bring in extra income.
  • Fitness: Turn your gym habit into a job by teaching some classes or coaching a team.
  • Carpentry: Use your woodworking skills to repair furniture for resale.
  • Auto mechanics: Instead of spending all your Saturdays tinkering with your own car, offer to do small repairs for neighbors and friends for some cash.
  • Music: Teach a few lessons a week to earn extra cash.
  • Pets: Provide services for people's pets like grooming, walking, feeding, or boarding. Have you seen Dogvacay? (Don't worry, feline lovers, there is also a site for your furry friends, too.)
  • Cooking: Making meals or baking can be lucrative. Everyone's gotta eat!
  • Driving: Get on the road with Uber or Lyft, and cash in.

With a little bit of time, networking, and help from a website that sells your art or advertises your services, you can make a surprising amount of money off your hobbies. Emergency fund boost, check!

Even odd jobs can make you extra money.

Not sure you're particularly talented in a profitable area? No problem.

Jaime, the author of the money-saving blog, No Getting Off This Train, suggests doing odd jobs to earn money for your rainy day savings: "This could be anything; mowing grass, shoveling snow, even using skills like fixing computers or designing artwork. Think about the skills you have, and how you can make money with it. Somebody out there needs you."

extra cash with odd jobs

Check out these popular odd-job sites for money-making opportunities.

  1. Mechanical Turk
  2. TaskRabbit

popular skill or task websites

You may not have a specialty skill, but if you can walk a dog, take out the garbage, or even feed a cat, you can easily make some extra cash to put towards your emergency fund. And, since these jobs don't require much of a build-up phase, you can grab them quickly to supercharge your emergency savings.

10. Spare some change—round up your purchases and put the change in savings

See a penny, pick it up, all day long you'll have good luck!

While luckiness is debatable, the effectiveness of valuing and saving pennies is not. Saving spare change can add up to a lot of savings for your emergency fund.

BudgetsAreSexy shares the testimonial of an assertive spare change saver:

testimonial quote

There are also apps and banks that will automatically round up your purchases to the nearest dollar and deposit them in your savings account.

  • Acorns: an app that invests any virtual spare change from debit/credit card purchases into tailored portfolios. Plus, you can withdraw funds at any time.
  • Bank of America's Keep the Change Savings Program: seamlessly transfers your spare change into savings if you have a checking account, debit card and savings account with them.

11. Guard your emergency fund like your life depends on it—because it might

You already know what your emergency savings are intended to fund, but once you've filled an emergency starter fund with $1K-$2K, it's tempting to dip into it for unexpected expenses that aren't necessarily emergencies. This can rob you of much needed money in the event of an actual emergency.

To determine if something is truly an emergency, Dave Ramsey recommends that you ask:

  • Is it necessary?
  • Is it urgent—does it have to be paid for now?

If the answers to the above are both "yes," then use your emergency fund. But also ask yourself: Is this really an unforeseeable expense, or could you expect it again in the future? If you could, then try to include it in your regular budget moving forward.

There are some life circumstances that qualify as an emergency. Check out this list of the top seven reasons you need an emergency fund, gleaned from LearnVest:

  1. You receive a pink slip—you're now unemployed.
  2. You can't shake that cough—you see five doctors within the month, and max out your health insurance.
  3. The only job you can get is three states away.
  4. Your car makes a funny grinding noise—and without this repair, you won't be able to drive to work.
  5. You need to get to the ER, stat!—ambulance rides are often not covered by health insurance.
  6. Someone close to you passes away—and you need to travel at short notice.
  7. Your roof starts leaking—some home repairs just can't wait.

On the other hand, there are some seemingly unexpected happenings that are not emergencies. Paula Pant, an award-winning money management writer and author of popular finance blog, Afford Anything, in an article on TheBalance about when to use your emergency fund, clarifies:

Many people are caught off-guard by major once-a-year costs like their property tax bill, additional income tax they owe, renewing their car registration, and buying holiday gifts. But these aren't emergencies.

You know that you'll have to pay taxes once a year. You may not know exactly how much money you'll owe for taxes, but you know that you'll have to pay something. You should budget a little bit of money each month for this bill.

You may want to have yet another separate savings account for these types of yearly or quarterly expenses. To save for taxes, though, consider asking your employer to withhold more money from your paycheck each month—this may end up in a surprising tax refund, or it may just lower the nasty tax bill at the end of the year.

top 10 reasons to go bankrupt

If you don't earn regular wages, you can pay the IRS quarterly estimated tax payments, so you're not stuck with one big bill at tax time.

Remember, only use your emergency funds for true emergencies. If you need help deciding whether something is an emergency, consult a financial planner to see if there's another way to foot the bill.

12. Pay off high-interest debts with emergency savings over $1,000

It's tough to decide whether to pay off your existing debts or save up to prevent the future debts that are caused by unexpected emergencies. You're balancing a fear of the known expenses with a fear of the unknown expenses—and neither fear feels good.

So, which should we fight first—our fear of the past or our fear of the future? When facing fears, facts can help shed light on the monsters in the closet.

Simple math, which we share below, can show you the best way to prioritize paying off debts with your emergency funds—how much are you paying in interest every month vs. how much you are able to save every month. After you do the math, you can decide if you want to tweak your repayment plans to alleviate your anxiety further.

Here's how to create a balance between building your emergency fund and paying off debts:

  • Write down the amount you can pay-off/save each month, based on the steps above
  • Save $1,000-$2,000 in a basic emergency fund while paying the minimum payments on your old debts
  • When you've saved a basic emergency fund, use the monthly amount you were contributing to the fund to instead pay off your debts—in order from greatest interest rate to least interest rate
  • Use a debt repayment calculator to determine the most cost-effective way to pay-off your old debts. You may want to refinance or consolidate high-interest debt with a lower-interest loan.
  • Once, you've paid off high-interest debts, go back to putting extra money toward your emergency fund until the balance equals 3-6 months worth of essential expenses.
  • Continue paying monthly minimums on low-interest debts, like student loans and mortgages.
  • Once you've accumulated 3-6 months savings, begin paying off low-interest debts more aggressively.

13. Do not use your emergency fund to pay off low-interest debt like student loans

When you're on a roll paying off debt—or making a "debt snowball"—you may find that you value becoming debt free above all else. But low-interest debt, like student loans or mortgages, may be better repaid over time if it's competing with your ability to fill an emergency fund.

This is especially true if your debt has a low interest rate attached to it. If you spend all your extra income paying that down and then an unexpected cost pops up and you don't have money available, you'll just need to borrow again. In other words, you've just pushed through a revolving door—dollar dizziness, here you come.

top 10 reasons go bankrupt pt2

David Weliver, a personal finance expert and founding editor of Money Under 30, gives some clarity to the debate about which debts you should pay off before concentrating on filling your 3-6 months' worth of emergency money:

definition of bad debt

student loans debt

To decide if your loan repayment is more important than your emergency fund, ask:

Do I have at least $1,000 - $2,000 saved for common emergencies? If not, consider putting at least some of your energies toward paying yourself first.

Is the loan's interest rate greater than 7%? If so, refinance or start paying it off fast.

14. Use apps and online tools to help meet your rainy day savings goal

Most of us rely on mobile phones and other technology to get things done. Check out some of Investopedia's favorite free emergency fund apps:

  • Digit: Tracks your spending habits and moves small amounts of money that it thinks you can spare into a savings account. If they're wrong, they'll cover your overdraft fee.
  • Level Money: This is more of a budgeting app that tracks your income and spending to reveal what's left over at the end of the month for your emergency fund
  • PlentyFi: An automatic savings program that boasts that its users put aside an average of $300 a month

Similarly, if old-school isn't your style, use an emergency fund calculator online to help you break down the bare-bones expenses in your life so you know how much you need to save for emergencies. Use CreditLoan's free emergency fund calculator to determine your magical savings goal.

top 2 reasons americans go bankrupt

15. Take a class to better build your emergency fund

If you're spurred on by group dynamics, sign up for a local class in personal financial management to get started on filling your emergency fund.

16. Consult a financial planner

If you are struggling to prioritize a myriad of debts, bills, and investments, it may be time to talk to a professional. You'll want a financial planner who is certified and who isn't affiliated with any particular investment companies—neutral advice is best. You'll also need to weigh their fees—hourly, per consult, or other.

And yes, although seeking, and—operative word here— leveraging—the advice of a financial planning will cost you, we explain why there's tremendous value in the "Step-By-Step Guide To Choosing A Financial Planner:"

Having a professional by your side helping you assess investment options and make the tough choices can set you on the right financial road, so you end up exactly where you want and achieve your much-desired goals.

having a professional quote

To find a trusted certified financial planner, ask friends and family in your neighborhood for recommendations, or search the National Association of Personal Finance Planners for a referral. Always remember to check their affiliations, licensing, and fees.

Here's everything we've covered in an easy to follow "cheat sheet" to help you take action.

  • Detail your budget.
  • Cut unnecessary spending and determine how much money you can spare to build an emergency fund.
  • Earn extra income through side gigs and hobbies.
  • Determine how much you need for emergencies—use an emergency fund calculator for help.
  • A basic emergency buffer is $1,000 - $2,000.
  • A true emergency fund can handle 3-6 months of essential expenses
  • Open a savings account to store your emergency fund.
  • Set up automatic deposits into your emergency savings account.
  • When you've got less than $1,000 in emergency money, consider tackling high-interest debts with interest rates over 7%.
  • Continue filling and guarding your emergency fund relentlessly to make sure it has 3-6 months worth of emergency money.
  • Use apps, classes, and personal financial advisors to help you build your emergency fund.

financial budget planner

It may take you several months to fill a basic emergency fund, and several years to save 3-6 months of savings. But it's also possible that you'll save faster than you thought. Doughroller points out that "At a 20% savings rate, it would take you just four months to save a month's worth of expenses."

Whatever you're able to save, take steps now to protect yourself and your family from unforeseen financial emergencies. The peace of mind you get from having an emergency fund will be worth the sacrifices.

Have you ever had to tap into an emergency fund?

What would have happened to you, if you didn't have one set up?

Let us know in the comments below!

Learn More About Consumer Finance

  • Get help navigating complicated consumer finance issues
  • Increase your credit level
  • Accomplish your financial goals
Learn More

Leave a Comment