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You may know that you should have an emergency fund, but the question is: Do you? If you don't, you're not alone. According to a Bankrate.com survey of 1,000 adults conducted in June, 55 million people - about 23% of Americans - have nothing in an emergency fund, CNBC reported.
However, when it comes to those who do have an emergency fund, only 29% have at least six months' worth of expenses saved, according to the survey. Just 18% have three to five months saved, and 22% have less than three months saved. Overall, that's not a lot of people with money for emergencies at hand.
"There's no telling when you'll need to fix a leaky roof or cover an unexpected expense," Bankratesenior reporter Amanda Dixon told Business Insider in an email. "That's why having a rainy day fund is critical."
She recommended having enough emergency savings to cover six months' worth of expenses - and suggests cutting back on financial vices to meet that goal.
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Here, a certified financial planner (CFP) takes you step-by-step to help you build an emergency fund, no matter how much - or how little - is in it now, even if it's currently at $0.
Before you can plan how much money to put into your emergency fund, you need to assess your finances. "Good personal finance revolves around a key practice — preparation," Andrew Westlin, CFP at Betterment, told Business Insider. "In general, it is a good idea to have a minimum of three to six months of monthly expenses covered in your safety net fund."
He said to have an estimate for the smallest amount of money that you'd be able to live off of, month-to-month — including your total bills and expenses for essentials, such as housing, utilities, loan payments, food, clothing, transportation, and health insurance.
"Adding those expenses up will give you a good baseline for how much you need to start with in an emergency fund," Westlin said.
2. Estimate your "reemployment period"
Losing your job could be one reason you may need to live off your emergency fund.
"In case you lose your primary source(s) of income, you need an idea of how long you might be without that income," Westlin said. "One way to estimate how much you might need is to multiply your monthly minimum expenses by your reemployment period — the number of months it might take you to find a new job."
3. Set up a monthly goal
It's essential to set career goals and to get in a routine of saving. "Once you have a sense of your expenses, consider what you need to do to save (at least) that much each month," Westlin said. "This will get you into the habit of saving regularly, making the task less overwhelming."
4. Cut at least one frivolous spend
Like it or not, you probably overspend in certain areas of your life, such as ordering takeout, going to brunch too often, or maintaining an expensive hobby.
"Consider cutting one night of eating out a week or not getting coffee before work every morning," Westlin said. "Add the money saved from that spend directly into your emergency fund, because every dollar makes a difference."
5. Determine the best type of account for your emergency fund
Although it may be tempting to have your emergency fund be part of your everyday checking or savings account, Westlin advises against it.
“An emergency fund should be separate from your daily bank account, so you are not tempted to dip into the funds regularly,” he said. “For some, this could be a high-yield savings account. At Betterment, we recommend investing your emergency fund in a moderate-risk investment portfolio, such as our Safety Net Fund.”
Westlin also advised against keeping your emergency fund in cash, since you lose purchasing power over time due to inflation. “By investing these emergency savings, you can participate in market gains and mitigate inflation risk,” he said. “Of course, there is market risk to consider, so if you do choose to invest your emergency fund, we recommend adding a 30% buffer to your target balance to account for market fluctuation.”
6. Set up automatic transfers
You may already automate your bills, as well as money that goes into your savings from each paycheck, so automating money into your emergency savings account makes financial sense, too.
“Automation is your friend when saving,” Westlin said. “Use an online savings app, which allows you to establish rules for the transactions you make and will make automatic transfers on your behalf.”
7. Make sure the money is accessible
Your emergency fund shouldn't be too accessible, but it also shouldn't be in an account you cannot access at all.
"While you don't want to be dipping into it regularly, your emergency fund should be in a somewhat liquid account that you can access with a few days' notice," Westlin said.
