Your Ultimate Guide To The Emergency Fund

Your emergency fund is there to get you through your most difficult life moments. You will find out the exact number that works for you and the steps you need to steps you should take to build one quickly.


What we will cover

What are your bare bones expenses?

How much money do you need?

Emergency Funding Factors

Where should you keep your emergency fund money?

Building your financial fortress

What if you have debt?

The Steps to Building Your Emergency Fund

Beyond The Emergency Fund

The rain has come pouring down multiple times in my life.

Bad things happen all at once: my last grandmother died, my boyfriend broke up with me and I lost my job. And because I was living in a small house with my boyfriend I had to move out because I could no longer afford the rent. I felt horrible.

No job, no home, no future. But I really did have all those things, I just had to dig deep and find them and put my life back on track.

Things would have been a little bit different if I had an emergency fund with a few months worth of expenses saved up. I didn’t. I was only making enough money to cover my monthly expenses or so I thought. I was living on the financial edge and then got pushed off the cliff.

Learn from my mistakes.

There has never been a more important time to have an emergency fund. The world has gone crazy. The world is unpredictable. A global pandemic and economic shutdown have effected the entire world and shown just how fragile the economic system can be.

The best entrepreneurs take risk, but they take calculated risk and try to eliminate as much risk as possible.

You can never do enough planning. And it is never a bad thing to have a stack of cash waiting for you.

I admire Warren Buffett for many reasons. Everyone knows him for his stock picking ability and his billionaire status. But I think everyday Americans can learn more from the way he runs his business rather than what he says.

How does this relate to the Emergency fund? Give me a moment and we will get there.

Berkshire Hathaway did not start with Buffett, he just took it over and made it his own. What is the magic that makes Berkshire Hathaway and Buffet special? Insurance. In order to invest you need cash. You need cash that you can then go purchase stock shares with. Buffet started buying Insurance companies.

Insurance companies create what is called ‘float’. This is the money that is paid into the insurance company by policy holders, but the insurance company needs to keep in the bank in case they ever need to make insurance payouts. This case can be invested. The better the investment the larger the amount of float grows.

So Buffett uses insurance money to purchase stocks and then the magic begins. The shares the purchase have value and hopefully increase in value, but they also pay dividends. One of his largest holdings Coca Cola has paid quarterly dividends for decades. Those dividends go into a bank account and he uses them to purchase more shares or entire businesses. But he always maintains a certain amount of cash needed for his businesses in case of emergency.

Emergency financial lessons from Berkshire Hathaway:

A) Always have cash in savings account waiting for you to use it.
B) Diversify – Don’t just have one asset or one emergency fund. Have several.
C) Your money should work for you. Buy investments that generate return on investment.
D) Be frugal – Buy things when they are on sale.
E) Partner with others – Buffett has Charlie Munger. Berkshire has several CEO’s that run the various businesses.
F) Be intentional – Always be learning and searching for that next opportunity, business career, lesson to learn.

Your life is crafted one day at a time. One choice at a time. Build your own personal Berkshire Hathaway. Something solid that is going to last.

Everything costs money. Food, Health, Family, Work.

Build your financial foundation with your emergency fund.

This fund will allow you to stop living ‘paycheck to paycheck’.

You will become more intentional about how you want to live your life.

Start by determining what spending is really needed and what is ‘nice to have’.

Think in the short term, but plan for the long term

I have one dedicated ’emergency’ fund. But I also have many different accounts that could be used in case of emergency.

My primary emergency fund account is my High-Yield Savings Account. The bank I use is My Savings Direct. Ally Bank is another good place for a High-Yield Savings account. Online banks more often have a higher interest rate over traditional banks, because they want to attract new customers. Traditional banks like Chase, Bank of America and Wells Fargo have more branches to withdraw money, but often pay a lower interest rate.

Make a choice and move on. Do not worry about getting the best interest rate, because it will change over time as the government changes the rate. Your main concern should be having a reliable account to place your money where you can quickly access that money. The emergency fund is not where you are going to build massive wealth. That will come from your investment account.

For more information about getting started building wealth through investment check out our section dedicated to investing here.

Several different types of accounts can be used as an emergency fund. I have one dedicated ’emergency’ fund. But then I have several other accounts that could be used if I exhaust my emergency fund. Backups for your backup. You want to eliminate as much risk as possible of having to take bankruptcy.

I keep a checking account with 3 months worth of expenses, because I know that I might want to use that money to travel or purchase a new piece of furniture or give more money to cause that I believe in. Your checking account is short term, your savings account is long term.

You can adjust your numbers accordingly.

How much cash will make you fee comfortable? 3months, 6months, 12months, 24 months? You have to determine how much will make you feel comfortable.

Your emergency fund should be created before you pay off debt, buy a new house, new car, or invest.

Start with whatever amount you can. It all adds up. Then consistently add money to the account.

$100 x 12 months = $1200

$100 x $24 paychecks = $2400

Create your foundation first and then you can take more risks and reap bigger rewards. There has never been a more important time to have an emergency fund.

What expenses are really necessary for your survival?

A great starting point for an emergency fund is $1,000.

$1,000 is a good chunk of money that will generally cover any unexpected life expenses. This is a significant amount of money for someone to save, but is doable in a relatively short period of time.

The rule of thumb for an emergency fund is saving 3-6 months worth of living expenses. 3 months should be the minimum length of time for your funding to last. Your ‘expenses’ should be the bare bones amount of money that you need to survive if you lost your current income. How long would be able to survive if you lost your job? Or if you became ill?

The emergency fund is more necessary than ever.

Anything that can go wrong will go wrong. Who could have predicted that a pandemic would be able to shut down the world economy? And that so many traditional businesses would be so vulnerable to job losses and insolvency.

What are your monthly expenses?

  • Rent
  • Utilities
  • Car Payment
  • Student Loan Payment
  • Groceries
  • Gas

There are lot of items that I spend money on that are not essential. There are a lot of household items that I could stop buying or cut back on if money became tight. I think we all have frivolous spending that we could cut back on.

I would recommend that you have at least 1 year of living expenses saved in your emergency fund. This is one year worth of housing payments, groceries, transportation and health costs.

Only the essential should make it into your emergency fund account. Internet might be an essential, but new clothing is definitely not an essential. Get specific about what makes it into your budget and what gets cut.

Health is extremely important. Everyone will need a doctor at some point in their life. If you do a little preparation today your life will be easier tomorrow. It is a good idea to have a separate health account, like an HSA – Health Savings Account, for future medical expenses.

My current goal is to save up to 2 years worth of living expenses.

If you want ever want to quit your job or change industries or start your own business, you should save up more. You may need that money to during those lean startup years or to fuel a passion project.

Here is a chart of how much you would want to save based on monthly expenses:

Monthly Expenses
6 Months
1 Year
$500 $3,000 $6,000
$1,000 $6,000 $12,000
$2,000 $12,000 $24,000
$3,000 $18,000 $36,000
$4,000 $24,000 $48,000

I want to know your opinion, leave a comment, how much do you have or think a person needs in their fund?

Emergency Funding Factors

  • How much money in your bank account will make you sleep better at night?
  • How much are your housing costs? Could you decrease that amount if you had to?
  • Do you have a family or dependents? Children? Save a set amount extra for each person you are taking care of. You may want to consider adding an extra $500 to your fund for each child that you have in your family. Children always have unexpected costs.
  • If you are a singe person you might not need as much cash.
  • Are you the primary breadwinner? You may be able fund your account faster if more than one person is adding money to the account. You may want to add more money into the account if you are the primary person responsible for taking care of others.
  • Do you have debt? Student Loan, Credit Cards? You may want to keep the bare minimum in your emergency fund in order to make bigger debt payments.

Having money set aside for a rainy day will give you a greater peace of mind. This fully funded account will give you the foundation to achieve financial independence. Once you get into the savings habit, you can increase your contributions as your income grows. When have finished funding your emergency fund you can apply that amount toward your investment goals. Or your business goals.

Where should you keep your emergency funds?

  • High Yield Savings Account
    This is where most people will keep their money. This account pays you interest and the money is readily available when you need it.
    Ally Bank
    Marcus By Goldman Sachs
    Capital One
  • High Yield Checking Account
    Has a lower interest rate than the Savings account, but money is still readily available. Make sure this account is different from your regular spending account. You want to have a separate account for emergencies a part from your everyday spending. You do not want to be tempted into spending money that should be set aside.
    Charles Schwab
    Simple Bank
    Citi Checking
    This is an account that is designed for investing toward retirement. IRA – Individual Retirement Account. This account is taxable now, but your investment gains grow tax free. The beauty of this account is that any money that you put into this account can be withdraw at any time. So you can put a portion of cash into this account for an emergency and then invest the rest. The current yearly contribution limit is $6,000, but this is likely to go up with inflation over time. I use M1 Finance for my ROTH IRA.
  • Stock Brokerage Account
    This is your everyday stock purchasing account. There are so many different great brokerages out there today.
    TD Ameritrade

    Just google stock trading accounts and you will get a complete list. Make sure that you get an account that does not charge you to trade and allows you to purchase fractional shares. But with this account you can deposit cash and then use that cash to purchase stock. Stock is volatile, so any money you put into an investment will fluctuate. But stock investment are fairly liquid, which means that you can easily sell and get your proceeds in timely fashion. You can also leave a portion of your deposit in cash for a rainy day and invest the rest.

These are the best options for your emergency account. There are some other options you may have if you run into trouble.

Less desirable emergency fund options:

  • Credit Cards – line of credit or cash advance
  • Personal loan from a banking institution.
  • HELOC – Home Equity Line of Credit
  • 401k loan

These options should only be used as a last resort, because they will cost you money in order to get access to them.

Building your financial fortress

You could easily have multiple emergency funds by combining these different types of accounts. I would highly recommend that you open and fund an IRA, you will thank yourself later. The benefits of an IRA both traditional and ROTH are too good to pass up.

Start with a credit card. Open a credit card only to be used in the event on an emergency. that is your first and easiest emergency fund. Or if you already have a credit card call up the credit card lender and ask them if they will increase your spending limit. A large spending limit could be enough to cover any unexpected expenses. but remember that they will charge you a big interest fee for charges, so this should only be used as a last resort. Then open a ROTH IRA. Once that is fully funded open a taxable stock brokerage account and fund that account. During this time you will also want to be contributing something to your 401k.

Each of these different accounts, accomplishes a different goal. Retirement, Saving, Spending. Each one of these accounts start to build your financial fortress that will become so robust over time that you will be able to weather any financial storm. This foundation will also set you up to start investing, building generational wealth.

What if I have debt? Should I pay off the debt first or fund the emergency account?

It is more important to have something set aside for emergency over paying down debt. Lines of credit have lenders. If something were to happen to happen to you in many cases you can work with your credit lenders to work out some type of payment plan.

But if you have true emergency, there is credit lender you can negotiate with. The only thing that will help you when you lose your job is to have something set aside to help take care of you.

It is not a binary choice. You can fund your emergency account while paying down your debt. Once account is fully funded you can apply those savings paying down your debt.

6 Steps to funding your emergency account

  1. Determine the dollar amount that you want to have in your bank. Get specific: $1000, $5000, $20,000. What are your essential monthly expenses? How many months do you want your fund to last? 3,6,12,24
  2. Create a savings plan. Start small: $5,10,20 and ramp up over time or create even payments over time. It is important to create a plan that you will stick to, so maybe your payments need to be smaller over a longer period of time.
  3. Schedule those automatic deposits from your checking account to your savings account.
  4. Any unexpected windfalls, tax refund, Spare change move over into that account.
  5. Once you have hit the emergency fund target, create a miscellaneous fund. For any unexpected expenses. 
  6. Once you have hit your target, apply that same amount into decreasing any debt or investing toward retirement.

Beyond the Emergency Fund

Once I created my emergency fund, I did not stop. I created 2 more separate accounts for myself.

Travel, Car and Miscellaneous

I am notorious for getting random charges: parking tickets, business expenses, late charges. There are all kinds of different charges that crop up and destroy my budget. So I created the miscellaneous fund. This is money that I set aside every month for “mistakes” that I make or unexpected events.

Travel is part of my rich life. I love getting out from behind my desk and seeing the world. It reminds me that there is a big world out there beyond the city. But travel can be expenses. Plane tickets and hotel nights quickly add up. So I put a portion of my income away each paycheck to go toward my vacations. Sometimes it is not very much and I have to get creative with my trips and then other times I build it up and I can travel first class somewhere.

If you are interested in all my tips and tricks to travel on a budget and have incredible trips visit our travel section. I give away all of my best tips and tricks to make the most of any travel experience.

The emergency fund comes first, but then create different accounts for events that you know are going to happen every year. Christmas, birthdays, gifts, mother’s day, travel. Do not let these events through you off track. Plan for them in advance. Even if it is just a few dollars. It is better than having nothing and having to charge that events on the credit card and pay interest.


Your emergency fund is your foundation. Next comes true wealth building. You can build wealth by earning more at your day job, starting a side hustle, or investing smarter.

To get started in the investing arena head on over to our section on investing

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