How To Build An Emergency Fund (And Why You Need One)

Apr 23, 2021

While the Covid-19 pandemic has put a spotlight on the need to have an emergency fund, it’s long been a pressing need for many. Only 39% of Americans could cover an unexpected expense of $1,000 from their savings, according to a Bankrate survey from January.

In the blink of an eye, Covid-19 caused restaurants, retail stores, and other businesses to shut their doors unexpectedly, putting many out of work. While a pandemic is hopefully not a common occurrence, there are many other reasons why having an emergency fund is essential. Having an emergency fund is critical in case any of the following unexpected expenses occur:

  • Job loss
  • Home repair expenses
  • Auto repair expenses
  • Medical expenses
  • Other unexpected expenses

Emergency funds are not just used to cover unexpected short-term expenses, though. They are there to ensure you can continue paying your day-to-day living expenses if you’re out of work for an extended period of time. This includes things like:

  • Housing (rent or mortgage)
  • Utilities
  • Food
  • Transportation
  • Healthcare/health insurance
  • Debt payments

A general rule of thumb is that you should have an emergency fund that can cover your living expenses for 3-6 months. Having an emergency fund can be the difference between losing your home, your car, and being able to put food on the table or not. Now that you understand why planning and saving for an emergency fund is vital for you and your family, let's talk about some tips and best practices on how to build your own.

Figure Out How Much You Need To Save And Set A Goal

While 3-6 months of expenses is a common benchmark, everyone is different. Your personal financial situation can be very different from others, so you’ll need to take that into account. The size of your emergency fund can depend on factors including but not limited to the following:

  • Do you pay rent, have a mortgage, or own your home outright?
  • Do you have significant chronic health concerns, or are you generally healthy?
  • Do you work in an industry that is stable or one that is more prone to uncertainty?
  • Are you single, or do you have a family or children you support?

The best way to determine how much you would need per month to cover your daily expenses is to simply make a list of all of your recurring monthly expenses. Include only essential things like rent, utilities, food, car, health care, debt payments, and any other critical expenses you may have. Exclude non-essential items like entertainment, eating out, travel, new clothes, and gifts. Once you have an idea of your monthly expenses, you can take that amount and multiply it by the number of months you want your emergency fund to cover. The number might seem intimidating, but not to worry, we will be reviewing some strategies below to help you develop a savings plan to achieve it.

Get a free online quote in seconds.
Apply online in minutes and you could be covered within hours. No medical exams necessary (just a few health-related questions).

Identify Savings Opportunities Within Your Monthly Expenses:

The first step in identifying ways to save for your emergency fund is to take the monthly budget you just created and look hard at those non-essential monthly costs. Identifying what you can cut out or reduce now can provide an instant way to create some savings that you can put toward building your emergency fund. This can include canceling unused subscriptions, cutting down on eating out, or other cost-cutting measures. You may be surprised how many of those non-essential things you can cut out and not miss. Remember, this doesn’t have to be a permanent thing. Once you’ve built up an emergency fund, if you want to add some of those things back into your budget, you can always do that.

Set Up Automatic Savings:

One of the easiest ways to build an emergency fund is by setting up a process for automatic savings. There are many ways to do this. Your employer may allow you to split your paycheck, deposit some in a savings account, and the rest into your checking account. You can also have your bank make scheduled transfers of a preset amount into your savings account. There are even credit cards that round up your purchases to the nearest dollar and take that amount and deposit it in a savings account. The key with all of these is setting it up and forgetting it, allowing you to save without even thinking about it. You might be amazed at how quickly your automatic savings plan will help build your emergency fund.

Save Unexpected Influxes Of Income:

Another way to quickly build your emergency fund is to take advantage of any large financial windfalls like a tax refund, gift, stimulus check, etc. Doing this takes some financial discipline as for many, it is difficult to save when they have an unexpected stack of money burning a hole in their pocket. However, resisting the urge to spend it all is critical, as even if you only save a portion of it, you are taking a step in the right direction. Another thing you can do is anytime you get a raise, take a percentage of it and add it to your automatic savings plan. The urge to spend can be strong when you get a raise, just like if you have a one-time financial windfall, but if you start saving a portion of it before you get used to spending it every month, you will never miss it. These are both great strategies to help build that emergency fund.

Check-In On Your Progress:

Like with anything, it’s important to regularly check-in and see how you’re progressing towards your goal. If you find yourself falling behind, explore ways to up your monthly savings by either reducing expenses or saving more of your paycheck. Remember, it’s ok if you have unexpected expenses and have to use some of your emergency funds. That’s why you’ve been saving. If you have put a savings plan in place, you will replenish it in no time. If you’ve reached your goal, great, don’t stop saving as you can use those additional savings to plan for college or retirement, pay down any debt you may have, or replace that old car. Once you have built consistent savings into your monthly financial plan, don’t ever go back!

Life Insurance 101
Got a question about life insurance? Find what you're looking for in our handy guide.

Having an emergency fund is a way to provide financial stability for yourself, your family, and loved ones and should be a key component of everyone's financial plan. It can be overwhelming to think about saving several months' worth of expenses, but if you take the time to walk through the plan as we have outlined above, you may be surprised at how quickly you achieve your savings goals. When it comes to unexpected life events and planning for your family's financial stability, you may want to consider adding life insurance to your financial plan.

There are many types of life insurance available, and depending on your specific needs can be designed to fit any budget. Life insurance—like an emergency fund—is a way to plan for the unexpected. In the event of your unexpected death, it can help with areas like raising your children, paying off your house, and replacing your income. While death is not something any of us want to think about, planning for it to ensure your loved ones do not have to worry about finances at an already difficult time can provide significant peace of mind.

If you’re thinking about getting life insurance or adding additional coverage, Ethos makes life insurance easy. Our free online application process takes about 10 minutes, and medical exams aren’t required for most (just a few health questions are asked in the application). To get started with Ethos today, visit our site.


The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Any testimonials, opinions, advice, product or service offers, or other information or content made available here by third parties are solely those of their respective providers and not of Ethos which does not guarantee the accuracy, completeness, reliability or usefulness of such. You should consult with an attorney or other professional to determine what may be best for your individual needs. Ethos is not a fiduciary and does not make any guarantee, warranty, or other promise as to any results that may be obtained from using our content. To the maximum extent permitted by law, Ethos disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.