The Emergency Fund Demystified — Breaking it Down by Savings Goals

Building an emergency fund from scratch can be intimidating if you don’t know much you should be saving. Let’s demystify this important savings account by breaking it down into major savings goals.

Emergency Fund

Your First $100

For most people, saving $100 can happen easily enough. You just have to commit to spending less.

Sit down with your budget to see how you can save your first $100 — whether it’s a lump sum or the make of several contributions. Focus on entertainment, travel, apparel, and takeout costs — splurging on these expenses less often can expedite your first $100 in the bank.

While you’re busy saving your first $100 emergency fund, an unexpected expense that exceeds this figure can come along. If you can’t delay this expense, visit a website like Fora for ideas on how you can use a line of credit as a temporary stopgap for your emergency fund. If it sounds like a good deal, you can try to apply for a line of credit directly from Fora online.

Take pride in your first $100, even if it isn’t enough to cover an untimely unexpected expense. Everyone has to start somewhere — it’s just important that you stick with your savings goal, regardless of setbacks.

Your First $1,000

Personal finance advisor Dave Ramsey highlights $1,000 as an important achievement for savers who have to juggle debt and bills on a small budget.

At ten times the first goal, this emergency fund may contain enough cash to cover the next unexpected expense without using a line of credit, although having a line of credit on standby can still come in handy for bigger emergencies.

Three Months of Living Expenses

The most repeated advice for emergency funds has entered the chat: saving the equivalent of three months of living expenses. This is actually the lower threshold for most personal finance advisors, yet it represents a momentous moment in your savings journey.

With three months of living expenses, you can weather significant emergencies with greater confidence — even if you get laid off or fired. You have the luxury of that three-month cushion to pay the bills while you look for a replacement job.

Six Months of Living Expenses

Six months of living expenses is the upper threshold mentioned above. Half a year of living expenses may take years to achieve. In fact, the Economic Hardship Reporting Project director Alissa Quart says the average American would take two years to save just one month of living expenses, so this can be an overarching goal you strive towards over a large chunk of time.

This emergency fund is worth the time and effort it takes to achieve. After all, you won’t have to worry about bills for half a year if you get fired or laid off. It can also take care of smaller emergencies, like an auto or household repair, when you aren’t out of work. This larger balance also earns more interest, especially if you snag a high-interest savings account.

Saving Beyond Six Months

There’s nothing wrong with saving beyond the six-month rule. However, it’s not making the most of the money in your account. Once you have a six-month fund, you should consider focusing your savings power into investments.

Investing your money is the best way to build your wealth, as you’ll earn greater returns in these accounts. This way, you’ll have the best of both worlds: an emergency fund for the unexpected and investments for expected events, like retirement.