In 2023, my auto parts shop’s sales fell to less than half of normal for four months in a row. I had no emergency fund, so I covered the gap with loans. The interest ate so much of my
income that my annual revenue ended up close to zero.
After I recovered, I started my own emergency fund with $10,000, and today I’m in a good position because of it. You don’t need $10,000 to begin. You can start with $20. Here’s how.
What Is an Emergency Fund?
An emergency fund is money set aside only for unexpected, necessary expenses. It is not for sales, vacations, or new gadgets. Real emergencies can include:
- Job loss or a sudden drop in income
- Medical or dental bills
- Urgent car or home repairs
- Emergency travel for family
How Much Do You Need to start?
Think of it in two stages:
• Starter goal: $500 to $1,000. This covers most small emergencies and builds the habit.
• Full goal: 3 to 6 months of essential expenses. Count only must-haves: rent, food, utilities, insurance, transport, and minimum debt payments.
Example: If your essentials cost $2,000 a month, your full goal is $6,000 to $12,000. If your income is irregular (freelancers and business owners), aim for the higher end.
How to Start an Emergency Fund, Step by Step
1. Set a small first goal. Don’t stare at $10,000. Aim for your first $500.
2. Open a separate high-yield savings account: Keeping it apart from checking makes it harder to spend by accident, while still easy to reach in a real emergency.
3. Automate your savings: Set a transfer for payday, even $20 to $50. Consistency beats
size.
4. Use found money. Tax refunds, bonuses, birthday cash, and side income can go straight
into the fund.
5. Cut one or two expenses: Cancel an unused subscription or trim one grocery or takeout
habit and redirect that money.
6. Keep building: Once you hit your starter goal, grow it toward 3 to 6 months of expenses at
a pace you can sustain.
Where to Keep Your Emergency Fund
• High-yield savings account: the best option for most people. It’s safe, earns interest, and is easy to access.
• Money market account: similar, sometimes with higher rates.
• Regular checking: too tempting to spend.
• Stocks or investments: too risky. Your emergency fund should never lose value when
you need it.
Make sure the account is insured (FDIC in the US, CDIC in Canada, FSCS in the UK).
Emergency Fund vs. Paying Off Debt vs. Investing
A simple order many people follow:
1- Build a starter fund ($500 to $1,000)
2- Pay off high-interest debt, like credit cards
3 -Grow your fund to 3 to 6 months of expenses
4- Start investing.
An emergency fund protects your investments, because you won’t be forced to sell at a bad time. Ready for step 4? Read our guide on how to start investing for beginners.
Common Mistakes to Avoid
• Dipping in for non-emergencies. Decide your rules before you need them.
• Keeping it in your checking account. Out of sight, out of mind.
• Waiting until you can save a lot. Small amounts add up.
• Giving up when progress feels slow. Every deposit is progress.
• Not refilling it. After using it, make topping it up your first priority.
• Relying on loans instead. As my own story shows, borrowing in a crisis can cost far more than the emergency itself.
How much should I save per month?
Whatever you can sustain. Even $25 a week builds $1,300 in a year. As your income grows, increase it.
Should I save or pay off debt first?
Build a small starter fund first, so a surprise bill doesn’t push you deeper into debt. Then focus on high-interest debt.
Is $1,000 enough for an emergency fund?
It’s a solid start and covers many common emergencies, but it won’t cover job loss. Work
toward 3 to 6 months of expenses.
Where should I keep my emergency fund?
In a separate high-yield savings account that’s safe, insured, and easy to access.
Starting an emergency fund isn’t about big numbers. It’s about starting. Open a separate
account today, set up a small automatic transfer, and let it grow. Once your safety net is in place,
you can move on to building real wealth. Next, read our complete guide to building
wealth from scratch.