Start building your emergency fund: A step-by-step guide

Updated August 30, 2024 | Published August 26, 2024

Saving & Budgeting

A 2024 Bankrate survey shows that nearly 6 in 10 Americans are uncomfortable with their level of emergency savings. If you’re one of those that are feeling worried about what might happen to your finances in an emergency, we have some tips to help you start building your emergency fund so you can feel secure.

Emergency fund definition:

An emergency fund is a crucial financial safety net that can help you weather unexpected life events. Whether it’s a medical bill, car repair, or job loss, having a stash of cash can prevent you from going into debt. In today’s economy, we realize how difficult it can be for many to save money. We want to help you by teaching you which banking products you can take advantage of, which strategies you should think about using, and how to budget appropriately for your lifestyle. Here’s a step-by-step guide to building your emergency fund.

Step 1: Determine how much savings you should have

The general recommendation is to aim for 3-6 months’ worth of living expenses. This amount should cover your essential costs like rent, utilities, groceries, and transportation. Be sure to factor in things like childcare or pet care if that’s also an expense for you.

Step 2: Open a high-yield deposit account

A high-yield account is ideal for an emergency fund. It offers a higher rate of return than a traditional savings account, allowing your money to grow faster. Choose an account like a money market to experience higher returns while maintaining flexibility so you can withdraw at any time.

Step 3: Prioritize savings

Make saving for your emergency fund a top priority in your budget. Even small contributions can add up over time. Consider using automatic transfers to move a portion of your paycheck directly into your savings account each month.

Step 4: Reduce unnecessary expenses

Look for areas where you can cut back on spending. This might involve reducing dining out, canceling unused subscriptions, or finding cheaper alternatives for entertainment. Always ask yourself, “do I need this?” before making a purchase.

Step 5: Pay off high-interest debt first

Having debt that charges high-interest at the end of every month can really slow down the savings process. Pay off high-interest debt with the avalanche strategy. Make extra payments to your loans or credit cards that have the highest interest rate while only making minimum payments to the rest. Or consolidate that debt to a lower interest rate loan. Either option can free up extra monthly funds for you to put in your emergency savings.

Step 6: Increase your income

If necessary, explore ways to increase your income. This could involve taking on a side hustle, asking for a raise, or selling unwanted items.

Step 7: Be patient and consistent

Building an emergency fund takes time and discipline. Don’t get discouraged if you can’t save as much as you’d like initially. The key is to be consistent and make progress over time.

Tips for success:

Set realistic goals: Break down your target amount into smaller, achievable milestones.
Track your progress: Monitor your savings progress regularly to stay motivated. Tools like our Money Management and Debts tools in online banking can help you with this.
Avoid dipping into your emergency fund: Use your emergency fund only for true emergencies, not the vacation you want to take.
Review your budget regularly: As your circumstances change, revisit your budget to ensure it aligns with your financial goals.

Remember, a well-funded emergency fund can provide peace of mind and financial security. By following these steps and staying committed to your savings goals, you can build a strong financial foundation for the future.