How to build your emergency fund

We all know the rainy day is coming. We might not know when but we know with 100% confidence that a rainy day will be here when we least expect it. Your tire will go flat. Your phone will be dropped and completely shattered. The kids will need new a cavity repaired. Anything is possible!!


Financial planning experts, especially Certified Financial Planner’s like myself like to be on the more conservative side. We like to make sure that you have an emergency fund of at least 3 months worth of expenses if you are single. 6 months worth of expenses if you are married with dual incomes, and 12 months of expenses if you are married with only one person bringing in an income or if you have kids. I always like to make sure to explain what monthly expenses are. I am not talking about vacations or dinners out (discretionary expenses). I am referring to the bills that will not stop if you lose your job (fixed expenses) as well as any other necessities such as food and transportation (essential variable expenses).


68% of Americans live paycheck to paycheck and 57% of Americans have less than $1,000 in savings. Those are the stats that brings me back down to reality. This actually helps me understand my audience better because it allows me to understand that most people are starting from scratch when it comes to their emergency funds. Most people have a hard time saving 3-12 months of expenses because they are also paying off debt while trying also trying to save for retirement, etc. It is impossible to save without creating and sticking to a budget.


I subscribe to the belief that as long as you can save an initial $1000 in a high yields savings account (don’t invest your emergency fund, you need liquidity), you should be able to cover any rainy-day type of expenses but that’s only the beginning. What this means is that you should be proud of yourself when you save $1000 but you will not want to stop at $1000 because that won’t be able to pay for a new AC unit per say or your mortgage if you lose your job.


Remember that I am referring to most Americans but there are some people who have the means to put away large amounts of money at once and if that’s the case you can build your 3-12 month emergency fund immediately. 


There are some circumstances when you might need or want more money in your emergency fund. This would be when you know you have large yearly or quarterly expenses like property taxes or a high deductible heath care plan that you tend to use up every year. Other times there are people who don’t feel safe with only 3-12 months of expenses. You might not be able to sleep without knowing you have access to $100,000 were something to go wrong. In these cases the balances needed might be a bit high to not be earning an interest so you can look into a higher interest bearing account. Beware not to invest this money as your time horizon is close to a year and that is not enough time to take high risks. 


I hope this has brought some clarity around what an emergency fund is. Be encouraged. You can totally do this. Be patient but diligent and saving for your emergency fund will no longer be an emergency! 


Happy saving!

Pamela Rodriguez CFP®