Why You Should Have an Emergency Fund (And How to Build One)

Emergencies can happen at any time, and without any warning. Think about all the things that could go wrong in your life that would cost you money like a car repair bill, medical bill, and a job loss. 

An emergency fund is designed to minimize the impact of these expenses on your personal life by providing a safety net. After reading this post, you’ll understand why it’s so important to fund an emergency fund and how you can build one!

Why Every Millennial Should Have an Emergency Fund

Job Security Is Never Guaranteed

No matter how safe you think your job is, it’s never a guarantee that you’ll never get laid off. Whether it’s a new pandemic, financial collapse, bankruptcy, downsizing, acquisition, etc, there’s always a chance of getting laid off. Even people who thought they were safe working in big tech were laid off. The COVID pandemic led to a massive sweep of layoffs as well as the 2008 financial crisis. Even in the first quarter of 2023, the job market is unstable with layoffs occurring across industries. 

Lack of Savings

The majority of Americans don’t have enough savings. It’s a fact. According to this LendingClub report, 62% of all U.S. adults were living paycheck to paycheck in 2023. In Bankrate’s 2023 annual emergency savings report, 68% of people are worried they wouldn’t be able to cover their living expenses for just one month if they lost their primary source of income. What’s worse is that these percentages rise almost every year! 

Rising Debt

Younger adults like Millennials and Gen Zs are dealing with higher levels of debt than previous generations. In a consumer debt study by Experian, it was shown that Gen Z and Millennials are piling on debt at an alarming rate of 24.3% and 14.7%. 

Many who were surveyed feel impacted by the rising cost of everyday expenses. Rising debt can make it more difficult to save for emergencies, which is why it’s important to build an emergency fund sooner than later.

How to Build an Emergency Fund

Figure Out Your Monthly Number

The first step to building an emergency fund is to understand your finances. How much do you need in a month to live off the bare necessities? Think about your living expenses, recurring monthly bills like car payment, gas, and insurance, food budget, and other financial obligations. If those bills cost you $3,000 a month, that’s your number.

Set Your Emergency Fund Goal

The next step is to define your savings goal. Your emergency fund goal should be several months of your monthly number. Experts recommend that you save three to six months’ worth of your monthly number. This is a balance based on your risk tolerance and your future plans. Too little might not be enough, but too much can be an inefficient use of capital. 

Set Your Savings Plan

Once you have defined your emergency fund goal, determine how much you need to save each month to achieve that goal. You can use a budgeting tool to help you determine how much you can realistically save each month. If your goal is 6 months worth of your monthly number, which in this example is $3,000, you’ll need $18,000 in your emergency fund. If you can save $1,000 a month towards your emergency fund, it’ll take you 18 months to fund it from zero.  

Open Up A Separate Savings Account

To avoid dipping into your emergency fund for non-emergency expenses, open a separate savings account specifically for your emergency fund. This account should be easily accessible but not so accessible that you can quickly withdraw money. A high-yield savings account like M1 Finance or Marcus by Goldman Sachs can safely store your money for emergencies as well as for future investments. Both offer a high interest rate on its savings account and both apps are easy to use. 

Automate Your Savings

To make sure that you consistently save for your emergency fund, consider automating your savings. Set up an automatic transfer from your checking account to your emergency fund savings account each month.

Increase Your Income

If you find it challenging to save enough money each month to build your emergency fund, consider ways to increase your income. You could take on a part-time job or start a side hustle to earn extra income and then divert that money to your emergency fund. Read here on why side hustles can be so important. You could even look to get a new higher-paying job! 

Reduce Your Expenses

Another way to save more money each month is to reduce your expenses. Look for ways to cut back on your spending, such as by eating out less or canceling subscriptions you don’t use. Here’s a post on some ideas to save money. That extra money can be diverted to your emergency fund to quicken the process!

Reassess Your Emergency Fund Periodically

As your income and expenses change over time, it’s important to reassess your emergency fund periodically. You may need to adjust your savings plan or emergency fund goal to reflect these changes. For example, a relocation can affect your emergency fund goal if the rent is significantly higher or lower. 

Final Words

With the job market becoming more unstable and debt levels rising, it’s more important than ever to have a financial safety net in place. By setting a savings goal, creating a budget, and automating your savings, you can build an emergency fund that will provide peace of mind when unexpected expenses arise.

By following these steps, you can build an emergency fund that provides you with financial security and peace of mind. Remember that building an emergency fund takes time, but the effort is worth it in the end.