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How to Build an Emergency Fund & How Much to Save

By Priya

April 22, 2020

As much as we hate to admit it, we can’t control everything. Emergencies always pop up and unexpected stuff just happens. What you can control, however, is your financial ability to deal with emergencies. I recommend that building up a fully-funded emergency fund should be the #1 financial goal and priority for all my students. But it can be confusing to know where to start or how much to save. This step-by-step guide will help you determine how much to save and how to build up your emergency fund.

My emergency fund is my absolute lifeline. It was the first financial goal I ever focused on and I’ve kept it fully-funded for years. That doesn’t mean I haven’t had to use it, it just means I’ve replenished it whenever I have. Because the truth is that life happens. And when it does, your emergency fund will help you weather the storm and protect your progress towards financial freedom.

1. What is an emergency fund & why is it important?

Your emergency fund is a bit like self-insurance. You build it up to protect yourself financially from emergencies and unplanned events without having to use debt and credit cards. Its’ main goal is to keep you financially afloat during true emergencies and to protect your financial goals.

Picture this: you’re chasing financial freedom and trying to become debt-free but you don’t have an emergency fund. Suddenly, you’ve had an accident and you’ll be out of work for 2 weeks while you recover. During those 2 weeks, you aren’t earning any income. You also don’t have any emergency savings to fall back on.

Your only option to survive is to use your credit card. But by doing this, when you emerge from this situation, you have higher credit card debt. It’ll take you even longer to become debt-free and you’ll need to dedicate more money to making your debt and interest payments every month for the foreseeable future.

If you had an emergency fund, however, you could rely on those savings to get by for 2 weeks until you were back at work and earning an income. You wouldn’t have to use your credit cards so you wouldn’t accumulate more debt. You’re not eroding the progress you’ve made towards becoming debt-free.

Read more: Why Your Emergency Fund is Crucial to Achieving Financial Freedom

Emergency funds & credit cards

An important thing to note is that a credit card is not an emergency fund. It’s a ball and chain that’s going to take advantage of you when you’re at your most vulnerable. You should avoid using credit cards for emergencies unless it’s literally a question of survival. Using your credit card for emergencies will push you further into debt and increase your debt and interest repayments in the future.

Read more: 3 Essential Rules for Using Credit Cards Without Going Into Debt

2. How much should you save for your emergency fund?

This is a huge and somewhat controversial question when it comes to personal finances. How much should you save for your emergency fund? If you ask Google, you’ll get many different answers and it can be difficult to know which one is the correct one. You’ll be told that there is no right or wrong answer and whatever you think is best is good enough. Some will say that $1,000 is enough, others will tell you to save 3 months of expenses.

Your emergency fund needs to be robust enough to carry you through any emergencies you can think of. My emergency fund is probably significantly larger than most people think is necessary. I have 12 months of my net income saved, which is almost 2 years worth of essential living expenses. You don’t have to save that much if it isn’t right for you, but you do need to put some thought into how much you need to save for your fund.

To help you determine how much to save, break your emergency fund into two main components:

  1. emergency expenses; and
  2. income replacement.

Emergency expenses

Emergency expenses are out-of-pocket expenses for unplanned events. These are things like urgent car or home repairs, unexpected medical costs and last minute flights (for an emergency not a last minute holiday).

How much you save here will depend on your situation. If you drive an older car, you might need more saved up for repairs. Alternatively, it’s a good idea to save up enough to replace your car completely if you need to. If you’re generally in good health, you might not need to save up as much for unexpected medical costs.

Many of us have external insurance for our car, home and health. Your emergency fund should include the amount of excess/deductible you would need to pay in order to access your insurance.

I recommend at least $5,000 – $10,000 saved for emergency expenses. I know this sounds like a lot of money but you need to plan for the worst-case scenario. But the truth is that an emergency fund of $1,000 won’t get you very far anymore.

Read more: How to Prepare Financially for a Recession

Replacing your income

Income replacement is the biggest, most important and most overlooked part of your emergency fund. Many people save up enough for emergency expenses and then leave it there. And while this is important, it’s only half the picture.

Chances are that you’re more likely to lose your job or be out of work in a bad economy than you are to experience the roof of your home caving in. And losing your job without a safety net is a quick way to end up financially ruined. Your financial goals won’t matter anymore if you’re living in your car because you lost your job and couldn’t afford to pay your rent.

Therefore, it’s super important to save up enough in your emergency fund to replace your income in case you find yourself out of work. But how much do you save? Again, this will be unique to your situation and will depend on a couple of different factors:

  • how quickly you can expect to find another job given your skills and experience;
  • the state of the economy and job market in your local area;
  • whether your skills are easily transferred to another job or profession.

How much should you save for expenses?

The whole purpose of saving up enough to replace your income is so that you can cover your expenses if you lose your job. Keep in mind that this involves your essential living expenses only, and not all the fun and luxurious things we sometimes like to spend our money on.

Keeping your essential living expenses as low as possible will also help your emergency fund last longer if you need to use it. Below are some costs you should consider saving for in your emergency fund:

  • rent or mortgage payments;
  • groceries and essential household items like cleaning supplies and toilet paper;
  • insurance premiums;
  • essential utilities such as gas, electricity, water, mobile/cell phone and internet (you may need internet to help you find another job);
  • minimum debt repayments (try asking your creditors to pause your payments while you’re out of work. If this isn’t an option, you’ll need to continue making your minimum payments to avoid defaulting on your loans and having it sent to a collections agency);
  • ongoing medical expenses and prescriptions;
  • fuel.

Look over your past bank statement to determine how much you’re spending in these areas. This will give you an indication of how much you need to save up in essential living expenses per month. To plan for the worst-case scenario, I recommend saving up at least 6 months of essential living expenses. Even better if you can save up for 12 months!

Read more: 5 Ways to Track Expenses in Your Budget

How much should you have in emergency savings if you’re single vs if you’re married?

Another common debate surrounding how much to save in your emergency fund is whether that amount changes if you’re single or married. A common argument is that if you’re married, you have another person’s income to fall back on, so you need to save less.

I completely disagree with this argument. If you’re married, and you or your partner loses their income, you’ll be going from a double-income household to a single-income household. That means one income will need to support two people.

This is harder than supporting one person on a single income. Costs like your rent might stay the same regardless of how many people live in your home, but groceries, utilities and medical costs all increase if you’re supporting more than just one person. Therefore, if you’re married, your emergency fund will need to be larger than if you were single.

Go through the same exercise of checking your prior bank statements to see how much you’re spending on essential living expenses to determine how much you need to save in your emergency fund.

Read more: 7 Budgeting Myths You May be Falling For

3. Steps to build your emergency fund

Set your savings goal

Setting your savings goal should be fairly straightforward now that you know how much you need to save in your emergency fund. It should include savings for any emergency expenses as well as an appropriate amount for replacing your income and covering essential living expenses.

Review your budget & look for savings

Review your budget and see where you might be able to find more savings to dedicate towards your emergency fund. I recommend that your emergency fund should be your #1 financial goal and priority. All other savings goals and debt payoff (apart from your minimum payments) should be on hold until you have a completed fund.

Read more: How to Budget Your Money in 6 Steps (When You Suck at Budgeting)

Cut all non-essential spending to find more money in your budget. If you’ve cut everything you possibly can but you’re still not able to save enough for your emergency fund then your only option is to increase your income. Consider taking a part-time job or selling unused items around your home to build up your emergency fund.

Read more: 30 Easy Ways to Save More Money

Automate your emergency savings

To make saving up for your emergency fund as easy as possible, set up an automatic transfer from your transaction account where you receive income to your emergency fund account. This will ensure that you’re saving money first and spending what’s left rather than only saving what’s left after spending.

It also removes you from the equation as well as any temptation you may feel to spend the extra money you’re saving. Consider setting up the automatic transfer as a regular transaction until you’ve completed your emergency fund.

Replenish it as you go

Don’t be afraid to use your emergency fund if you find yourself in a true emergency – that’s what it’s there for. However, if you use any portion of your emergency fund, you need to replenish it as soon as possible. I recommend putting all your other financial goals on hold and focusing only on replenishing your fund.

4. Where should you keep your emergency savings?

Your emergency fund needs to be liquid and readily available if you ever need to access it. As such, it shouldn’t be tied up in long term investments like real estate. Further, you need to protect your emergency fund from investment losses. Therefore, I don’t recommend investing it in short term investment options either.

The best option is to keep your emergency fund in a high-interest online savings account. Shop around for a bank account that doesn’t have a minimum balance requirement or charge any account keeping and withdrawal fees.

Your emergency fund also needs to be out of your reach. It should be accessible when you need it but not something you can use for day to day spending. I’d recommend not keeping a debit card for your emergency fund. If you need to use it, you can transfer money out of your emergency fund and into your transaction account.

Read more: How to Use a Budget Calendar to Organise your Finances

5. Review & update your emergency fund

Your life and your budget changes, so your emergency fund should change along with it. If your living expenses increase, this needs to be reflected in your emergency fund. For example, you might move to a new home with a higher rent expense.

Similarly, your expenses will increase over time due to general inflation. This is one of the reasons why a $1,000 emergency fund isn’t enough any more. Prices go up, so your emergency fund should accommodate this.

Make a plan to review your emergency fund at least once a year. Check whether your essential living expenses are increasing over time throughout the year. You can then determine whether you need to increase your emergency fund.


Your emergency fund will be your lifeline when things go wrong. Not only will it help you cover emergency expenses without accumulating debt, but it will also help you stay afloat if you lose your income. Review your past expenses to see how much you’re spending on essential living expenses. This will give you a good basis to figuring out how much you need to save in your emergency fund. Your emergency fund should also be readily accessible and liquid, but not easy to spend. Review your emergency fund regularly to ensure it keeps up with inflation and changes in your lifestyle.

Priya

About the author

Hi, I’m Priya! I’m a Chartered Accountant and the creator of Paper Money Co. Life is too short to be constantly worried about money. I want my life to be more than just going to work to pay the bills. Join me as I strive to live a life I love on a budget I can afford (and without going broke)! Are you ready?

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