Emergency Funds 101: Why You Need One & How to Build It
If there’s one thing life loves to do, it’s throw surprises your way—some good, some… not so much. Whether it’s a sudden job loss, a major car repair, or an unexpected medical bill, financial emergencies can strike when you least expect them. That’s where an emergency fund comes in. Today, CERTIFIED FINANCIAL PLANNER™, Nichole Coyle, walks us through the reasons to prioritize your emergency fund, and how to get started building one.
As a financial planner, I’ve seen first-hand how having (or not having) an emergency fund can make or break a person’s financial stability. Let’s break down why you need one, how much you should aim for, and how to build it—step by step.
Why Do You Need an Emergency Fund?
An emergency fund acts as a financial safety net. Without one, unexpected expenses can force you into high-interest debt, derail your financial goals, or leave you scrambling to cover the basics. Here’s why having an emergency fund is essential:
- Avoiding Debt – When a crisis hits, credit cards and personal loans might seem like a quick fix, but they come with high interest rates that can trap you in a cycle of debt.
- Reducing Stress – Knowing you have a cushion can help give you confidence. Financial stress can impact your mental and physical health, and an emergency fund may help keep that in check.
- Protecting Your Investments – If all your savings are tied up in retirement accounts or investments, you may be forced to sell at a bad time just to cover an emergency expense.
- Gaining Financial Freedom – An emergency fund gives you options. If you lose your job, it buys you time to explore different possibilities and seek out opportunities that may be a better fit rather than taking the first opportunity out of desperation.
How Much Should You Save?
The ideal emergency fund amount depends on your personal situation, but here’s a general guideline:
- Beginners: Aim for $1,000 as a starter fund. This can help cover minor emergencies like a car repair or medical co-pay.
- Stability Seekers: Save 3-6 months of expenses if you have a steady job with minimal financial risks.
- High-Risk Households: If you’re self-employed, have irregular income, or work in an industry prone to layoffs, aim for 6-12 months of expenses to weather tough times.
- High Achievers: There is, however, such a thing as “too much savings.” The amount will depend on your circumstances, but once you determine what the emergency fund limit should be, direct those savings towards other investments to better serve your mid- to long-term goals.
How to Build an Emergency Fund
Starting to save towards an emergency fund for unexpected expenses can seem daunting, but it’s doable with a solid plan. Here’s how to make it happen:
1. Start Small & Automate It
Begin with small, consistent contributions. Set up automatic transfers to a separate savings account each payday. Even $25 or $50 a week adds up over time.
2. Cut Unnecessary Expenses
Look for areas where you can temporarily cut back. Streaming subscriptions, dining out, or impulse purchases can be redirected into your emergency fund.
3. Use Windfalls Wisely
Got a tax refund, work bonus, or birthday cash? Instead of spending it all, put a portion into your emergency savings.
4. Open a Dedicated High-Yield Savings Account
Keep your emergency fund separate from your everyday checking account. A high-yield savings account can provide higher interest rates than standard savings accounts. Because these accounts are often at a separate financial institution from your every-day checking, it can provide an “out of sight, out of mind” perspective and reduce the temptation to constantly pull from your savings for non-emergencies. Although you may keep the majority of your savings and your checking accounts at different financial institutions, you’re still able to keep it accessible.
5. Side Hustle for Extra Cash
If your budget is already tight, consider picking up a temporary side gig to boost your savings. Even a few extra hundred dollars a month can accelerate your progress.
6. Replenish When Needed
If you need to dip into your fund for a true emergency, that’s okay—that’s what it’s there for. Just make sure to build it back up afterward.
When to Use (and NOT Use) Your Emergency Fund
Your emergency fund is for unexpected, necessary, and urgent expenses. Some good examples include:
✔️ Medical emergencies
✔️ Job loss or income disruption
✔️ Urgent car or home repairs
✔️ Emergency travel for family crises
It’s not for:
❌ Vacations or entertainment
❌ Routine expenses that should be budgeted for (like annual insurance premiums or expected home renovations)
❌ Investing in stocks or real estate
Start Building Your Emergency Fund Today
An emergency fund is one of the most important foundations of financial security. It can help keep you from falling into debt, gives you breathing room during tough times, and allows you to stay on track with your long-term goals. If you haven’t started one yet, today is the best day to begin—even if it’s just with a few dollars.
Need help creating a financial plan that includes an emergency fund? Let’s chat! I’d love to help you build a strategy that fits your lifestyle and goals.
Managing Partner, Financial Planner
2300 St. Clair Ave NE
Cleveland, OH 44114
216.621.4644 x1607 office
330.607.2213 cell
nichole@impactcfp.com
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor.
Cetera is not affiliated with the financial institution where investment services are offered or any other named entity.
Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Posted In: Guest Blog, Saving
