Building Your Emergency Fund

By Kevin Gibbons

Now that the thrill and excitement of the New Year has had a chance to ebb, it’s a good time to think about your Emergency Fund. Almost every financial advisor and planner recommends that you have an emergency fund so you can pay for unexpected expenses without having to go into debt or experience hardship. Different people recommend different amounts of money to keep in that fund, but the general rule of thumb is three to six months’ worth of your essential expenses.

An Emergency Fund serves two purposes. It provides for paying your expenses for three to six months in case your income is interrupted due to illness or loss of job; and it provides a means for paying for unexpected expenses like repairs to your auto or home, or medical bills. You need to look at your financial and lifestyle situation and determine how much money you need for this fund.

The beginning of the year is a good time to review your Emergency Fund Plan. If you had an emergency fund last year, was it sufficient? Did you tap into it? Have your circumstances changed this year that would affect the amount of money you should set aside? We’ll look at each of these questions in detail and end with some simple steps and recommendations for 2018.

Your 2017 Emergency Fund Plan – Did You Have One?

Last year, 41% of Americans said they could cover a $500 emergency by using their savings. But being able to “dip into savings” is not the same as having an emergency fund. An emergency fund is there so you don’t have to dip into your savings, money for which you probably have another purpose in mind (like paying for a vacation, buying a new car or funding your hobby). If you didn’t have a dedicated Emergency Fund in 2017, set one up in 2018. Look into setting up a completely separate savings account at your bank or through an Internet Bank. CapitalOne has an online savings account that can be opened for as little as $1. Set up an automatic transfer to this account on a weekly or monthly basis, whatever you can afford. The important thing is to put aside some money. Even if it’s only $20/week, that will still add up to $1,000 for emergencies by the end of the year.

Did you tap into your emergency fund?

Don’t feel bad if you used your fund last year. That is what it is there for! But did you use it for a true emergency? If you “raided” your fund because you miscalculated expenses, or wanted to buy something you liked, then think about what you can do to keep that from happening this year. Something that may sound counterintuitive is to put less money in your emergency fund. Instead of putting $250/month in your emergency fund and then depleting it for non-emergencies, consider putting $175 in the emergency fund and $75 in a discretionary savings fund that you can use for those non-emergency expenses. It may seem that it would take longer to build up your emergency reserve, but you won’t be depleting it for non-emergencies. Use Targeted Savings and Targeted Spending to your advantage.

Have Your Circumstances Changed?

Remember the recommendation to have three to six months’ essential expenses saved up in your Emergency Fund. If your circumstances have changed, you may need to make adjustments to your savings plan. If you bought a new car, you need to cover the car payments. Conversely, if you paid off a car loan last year, you may not need to have as much money set aside for this year.

Steps and Recommendations

  • Start Saving Today. Even if it is only a small amount, start setting money aside right now.
  • Put the money somewhere easily accessible, but distinct. You don’t want to have to wait three days or a week to get your emergency money when you need it. But, keep it in a distinct account so there is no temptation to “borrow” from it.
  • Check your actual emergency expenses from last year and your likely ones from this year. I have a friend with some rather “adventurous” hobbies. She actually budgets for 4-5 trips to the emergency room every year and the associated expenses. If you have a car more than seven years old, set money aside for repairs (this is distinct from maintenance costs).
  • There are no bonus points for exceeding your plan. If you have your emergency fund well-established, and at a level you think appropriate for your financial and lifestyle situation, then take the money you would be putting in that fund and pay off debt or dedicate it to another targeted savings plan. All your money should have a purpose.


Kevin Gibbons is the Chief Operating Officer of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past nine years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 500 individuals and families to create Spending Plans.

They also work with financial advisors and their clients doing cash flow planning as well as giving Savvy Living presentations via webinar and in-person to audiences across the U.S.

If you’d like to learn more about how Kevin and Melissa work with clients, visit The Savvy Life’s Programs page.

If you’d like to learn more about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page