10 Steps to Take to Start Building Your Emergency Fund
By: Baylee Bryant
Tags: Saving Money, Budget, Personal Finance, Fire Movement, Emergency Fund

If an emergency fund had a formal title, it would probably be How to Deal with Life, and Other Dangerous Situations.

Daniel Kahneman is a Nobel-prize winning psychologist and economist. He’s the author of Thinking, Fast and Slow and has been listed by The Economist as one of the most influential economists in the world. As one of the founders of behavioral economics, Kahneman’s biggest contribution to economics has been to challenge the “rational human” assumption that has prevailed in economics since it’s inception. In other words, Kahneman analyzes human error.

Why does this matter?

Because even Kahneman, a world-renowned expert in anything and everything involving human risk and error- emphasizes the importance of emergency funds.

Regarding all of the millions of little things that can- and unfortunately do- go wrong in our lives, Kahneman says this:

“The correct lesson to learn from surprises is that the world is surprising.” Daniel Kahneman.

That’s it. You can plan for everything, have strategies A through Z- and something will still go wrong.

And this year, we’ve had a lot of surprises: bushfires in Australia (yes, that was this year!), the 2020 recession, Covid 19, protests (particularly surprising if you live in a city!), etc. Do you remember murder hornets and World War III?

And that’s not to mention the surprises we’ve all dealt with on individual levels. Blown tires, unexpected medical bills, layoffs and furloughs, and so, so many more.

The whole nature of surprises is that they can’t exactly be planned for.

So which is easier? To plan for every little thing that COULD go sideways in your life or to just plan on there BEING surprises? Kahneman is an advocate for the latter, and when it comes to personal finance it’s one of the biggest topics around.

So what exactly is an Emergency Fund?

Emergency funds encapsulate the idea that you can plan for emergencies before they actually happen, even if you don’t know what the actual emergency will be.

Because unfortunately, it’s never a matter of “if” something unexpected will happen, but “when.”

This graph shows the traffic for the search term “emergency fund” on Google between December, 2019 and August, 2020. Around March, Covid 19 was beginning to take it’s toll and millions of people filed for unemployment.

Unfortunately though, the hardest time to save is when you’re forced to. Trying to get together an emergency fund once the emergency has already happened is like trying to board up your windows in the middle of a hurricane. More often than not, it’s too little, too late!

That’s why it’s more important than ever to start building your emergency fund today.

Below are 10 steps you can take to get started!

10 steps you can take to start building your emergency fund today.

Find your number.

The first step to building an emergency fund is to know your number. It’s tempting to think, “Eh, I’ll be okay. I have some cash on hand.” But that kind of thinking is problematic for two reasons. First, you may not actually have enough money to ride out an emergency. And second, because you might actually have too much money sitting in a savings account that could be used better elsewhere.

Most money experts agree that an appropriate emergency fund consists of 3–6 months of living expenses. So if you typically spend $3,000 a month, then your emergency fund will be somewhere between $9,000-$18,000. To make sure you’re getting a comprehensive view of how much you actually spend, feel free to use [THIS CHART] to fill in any items you might have missed.

2. Open a separate savings account

Dr. Dan Ariely, one of the world’s most renowned behavioral economists, once said, “The checking account is like the trash can of personal finance.” (By the way, you can listen to his full episode on ). But why? Simple. Because checking accounts don’t have an end-goal. They constantly have money flowing into and out of them and they’re harder to keep track of.

I witnessed this firsthand when I worked as a Personal Banker. It wasn’t uncommon for clients to find multiple instances of fraud on their checking accounts spanning months. Because when you have twelve transactions in a single day, it’s easy to miss the $7.99 Netflix charge that doesn’t belong to you or the $20.00 gas charge from the town over. In fact, many fraudsters don’t try to wipe accounts out completely, they simply make small, consistent charges that people’s eyes glaze over when (IF) they look at their statements.

So open a savings account where you can be clear exactly how much money you have set aside for emergencies.

As far as accounts go, I always recommend online High-Yield Savings Accounts (HYSA’s). I personally use Ally Bank.

3. Explore different budgeting styles

Now that you have a concrete goal for your emergency fund, you’ll want to set up a system to add money to it consistently. Budgets are a great way to get started because they encourage you to prioritize what’s important to you (in this case- building an emergency fund!) and give each dollar a job. Budgets also help you grow the gap between what you earn and what you spend, which will result in more savings.

I have a whole highlight about some of my favorite alternative budgeting styles on , and an excellent article about budgeting from Atypical Finance.

Don’t be afraid to try one out for a week or two and if it doesn’t work out for you, try another one! The best budget is the one that you stick with.

4. Pay yourself first

No matter which budgeting style you go with, what’s most important is that you “pay yourself first.” In other words, every single pay day- before you spend money on anything else- you take out what you need for your emergency fund. You can think of this as “paying your future self” or “saving for your future self.” The money is still very much yours and it will most likely be spent at some point, but not today!

5. Set up auto-deductions for savings

The best way to pay yourself first is to set up your funds to be automatically transferred from your checking to your savings account at regular intervals. When you set up auto-transfers, you’re removing one of the biggest obstacles towards savings (that is: thinking about it and actually going through with it!). Your brain is more likely to think of the auto-transfer date like a bill, just like other bills and subscriptions that are pulled from your account automatically.

6. Experiment with savings apps like Qapital

One way you can set up auto-deductions from your checking account and into your savings account is to download an app like Qapital. Qapital is the first app that I used to start saving money while I was in college, so it’s been around for a while. But a whole host of savings apps have become popular since then, such as Acorns, Mint, and EveryDollar.

Here is a screenshot of the most common “rules” on there at the time of this post.

If it’s your first time saving for a serious goal, then one of these apps might just give you the motivation that you need. In fact, the true power in these apps isn’t the actual money that you save- it’s the habits that you form. After you’ve been following a set of guidelines for a while they become second nature. So before you know it, you’ll be accustomed to things such as:

- Saving $5 any time you go to Starbucks.

- Living on 80% of your paycheck, because the difference will go directly to savings.

- Sending $50 to savings every Friday

If you can save enough for an emergency fund by forming these habits, then imagine how much you could save in the long term!

7. Sell what you no longer need.

If you haven’t done so yet, starting an emergency fund is the perfect opportunity to clean up shop. Go through your closet, cupboards, and kitchen, and then kick-start the funds in your account by selling what you no longer need on eBay, Craigslist, OfferUp, etc.

Remember, all of those “things” used to be money!

8. Join a savings challenge

I am a HUGE fan of savings challenges! They do a wonderful job of getting you out of your money ruts, seeing your finances in a new light, and encouraging you to take over your money.

Savings challenges are so successful because they do something called gamifying your finances. Similar to savings apps and budgeting software, they give you an end-goal that is satisfying to work towards. If you’ve been feeling like your finances have been aimless lately, then building your emergency fund by completing savings challenges is a fantastic way to get back on track.

I personally host savings challenges often via my Instagram. Or check out my Top 6 Savings Challenges for instructions to start your own at your leisure!

9. Make a financial vision board

Financial vision boards are a fun way to contemplate what’s really important to you and why. On a typical financial vision board you might put pictures of a city you want to live in, the pet you want to have, or the business you see yourself working towards.

Check out one of my previous posts to read all about how to create a financial vision board!

If you’d like to gear your vision board more specifically towards building an emergency fund, here are some extra elements that you might want to highlight:

- pictures of your immediate family

- quotes that inspire you

- your goal emergency fund number (ex. 20k!)

- Self-care elements & other things that comfort you

Okay, self-care elements might seem a little far out there for personal finance advice, but at the end of the day, that’s all an emergency fund really is. It’s you telling your future self, “Don’t worry, I got this.”

Building an emergency fund is one of the first steps to start building wealth for a reason! Because even though the amount you need will be finite, the feeling of security that comes once it’s finally complete is priceless.

10. Don’t be afraid to start small

“I don’t have enough money to start saving. I’m barely getting by as-is.”

Trust me, I know exactly what you mean! Here’s a moment of clarity: for a lot of people, saving really is long and arduous work. Some people will be able to build their emergency fund in weeks, whereas other people might take a year or longer. Personally, my first emergency fund took me over six months to build, and I started with it 20% funded, too!

But one thing that’s helped me a lot over the years is not being afraid to start small. Yes, even as small as a dollar. It might seem like nothing at the time, but I can’t tell you how many emergencies I’ve had in the past that came in around $80, and having any emergency fund- no matter how small- gave me a huge sense of relief. Every dollar really does count. Having a separate savings account with $20 in it might feel like a life saver the next time you come down with the flu!

Finally:

If you enjoyed this article and want to take part in the Up at an Angle community, feel free to subscribe to my emails or follow me on Instagram, where I’ll be hosting regular money challenges for the community to check in with. Thank you!