How to Build an Emergency Fund from Scratch

Life is unpredictable. Car repairs, medical bills, home emergencies, even unexpected travel expenses can hit at any time. An emergency fund, often its own savings account, ensures you’re prepared without relying on high-interest credit cards, payday loans or asking for help from your friends and family.

Key benefits of an emergency fund

• Reduces financial stress and anxiety
• Protects your credit score from unplanned debt
• Provides peace of mind during uncertain times
• Helps you take advantage of opportunities without financial strain

For example, imagine your car breaks down unexpectedly. Without an emergency fund, you might have to put the repair on a high-interest credit card. With a fund in place, you can cover the expense immediately and avoid added financial pressure.

Step 1: Set a Realistic Savings Goal

Most financial experts recommend saving three to six months’ worth of essential living expenses. However, the key is to start somewhere — even if your initial goal is just $500 to $1,000.

How to make it manageable:

• Break your goal into smaller milestones (e.g., $100 per week or $500 per month).
• Celebrate each milestone to maintain motivation.
• Adjust your goal as your financial situation changes.

Pro tip: Even a small emergency fund can prevent financial panic during minor surprises and build the habit of saving.

Step 2: Track Your Expenses

Before saving, understand your monthly spending. Categorize your expenses into:

• Housing (rent or mortgage)
• Utilities
• Groceries
• Transportation
• Insurance
• Other essentials

Once you know your baseline, you can determine how much to contribute regularly to your emergency fund. Tracking spending, such as with a mobile app, also highlights areas where you may be able to cut back temporarily to accelerate your savings.

Step 3: Create a Separate Savings Account

Keeping your emergency fund separate from your checking account prevents accidental spending and keeps your savings visible.

Best options for emergency funds:

• High-yield savings accounts: Earn interest while keeping money accessible.
• Money market accounts: Combines liquidity with competitive interest rates.
• Certificates of Deposit (CDs): For portions of your fund you can leave untouched longer, potentially earning higher interest.

Pro tip: Set up automatic transfers from your checking account to your emergency fund to make saving effortless. Even $25 per week adds up quickly over time.

Step 4: Start Small and Stay Consistent

Even if you can only save $10, $25 or $50 per week, consistency matters more than amount. Small deposits add up over time and the habit of saving creates financial discipline.

Strategies to accelerate savings:

• Round-up apps: Automatically save spare change from debit card purchases.
• Direct deposit allocation: Allocate a portion of each paycheck to your emergency fund.
• Side income: Consider a side hustle or selling unused items to boost your savings.

Step 5: Prioritize Your Fund Over Extra Spending

It can be tempting to spend bonuses, tax refunds or holiday gifts. Consider allocating a portion of any windfalls to your emergency fund first. Similarly, adjust your savings when you receive a raise at work.

Pro tip: Treat your emergency fund like a monthly bill - it’s a non-negotiable part of your budget. This is also called “pay yourself first.”

For example,if you receive a $1,000 tax refund, consider putting at least $500 into your emergency fund and using the rest for planned expenses or paying down debt.

Step 6: Deal With Common Challenges

Starting an emergency fund can feel daunting, especially if money is tight. Here’s how to overcome common obstacles:

1. Limited income: Begin with very small contributions. Even $5-$10 per week is progress.
2. Irregular income: Save a percentage of each paycheck or freelance payment instead of a fixed amount.
3. Temptation to spend: Keep your fund separate and track progress visually with charts or goal trackers.
4. Unexpected emergencies: Use a small, temporary loan only if absolutely necessary, then replenish your fund immediately.

Step 7: Reassess and Adjust as Needed

As your life changes - new job, moving, expanding family - revisit your emergency fund goal. Gradually increase contributions until you reach three to six months of essential expenses.

Annual review:

• Check if your fund still covers basic living costs.
• Adjust for inflation or changes in expenses.
• Evaluate whether part of your fund could earn higher interest without sacrificing accessibility.

Step 8: Additional Tips for Success

• Track progress visually: Use charts or apps to see how your emergency fund grows.
• Celebrate milestones: Reward yourself (without dipping into the fund!) when you reach key goals.
• Avoid temptation: Keep your emergency fund in a separate account you don’t use for everyday spending.
• Include family: If you share expenses with a partner or relative, coordinate contributions for faster growth.

Putting It All Together

Starting an emergency fund may feel overwhelming at first, but taking small, consistent steps will set you up for long-term financial stability. Protect yourself against the unexpected, reduce financial stress and build a foundation for your future - one deposit at a time.

Remember: The best time to start is today! Even modest contributions will add up, providing peace of mind and security for the unexpected moments in life.

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.