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My emergency fund is worth tens of thousands of dollars, and I used a simple 5

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In the age of the coronavirus pandemic, it doesn’t take a big imagination to understand financial emergencies. A trip to the emergency room with virus symptoms could save your life, and lead to a bill for thousands of dollars. A lost job could mean you don’t have enough cash coming in to pay the rent, mortgage, or utility bills, let alone buy groceries.

But even in good economic times where we are not shielding ourselves from a highly contagious pathogen, there are plenty of times an emergency fund comes in handy. Unexpected repairs to your home or car, surprise injuries or illnesses, or a company layoff are always possible. 

I typically keep between six and 12 months’ worth of expenses saved in my emergency fund — totalling tens of thousands of dollars — and I used a strategy to save up that cash that can work for anyone. 

The first step to saving is having money to save. If you live paycheck-to-paycheck or struggle to keep up with the bills, a budget could help you plan ahead and make the best spending decisions.

A good budget also has room for savings and investments. If you’ve ever come across the phrase “pay yourself first,” it works because of a well-thought-out budget.

Remember that a budget doesn’t tell you where you can and can’t spend. You choose how much money to allocate to each budget category. Start with needs like housing, utilities, transportation, and groceries. From there, you should add in savings and investments.

Fun spending like entertainment and dining out should be the last priority in your budget. However, they are still very important. Most people can’t go for long periods of time with monk-like savings habits. It’s important to carve out a little money for things you enjoy. But make sure your savings are taken care of first.

Between savings and investments, I generally save well over 20% of my annual income every year.

You know you need to save, but where should you keep the money? The best place to store emergency savings is a dedicated high-yield savings account. This type of account generally gives you the best possible interest rates while avoiding any risk with your funds.

Bank accounts in the US are insured by the FDIC, which means your deposits are guaranteed by the government up to federal limits — currently $250,000 for an individual account or $500,000 for a joint account.

I actually have a few different high-yield savings accounts for my emergency fund, housing costs, and general savings. The interest rates you get from high-yield savings are not amazing in early 2020, but they are still a lot better than what you get with a savings account at a traditional bank.

When planning for emergency savings, think back to the Tortoise and the Hair. Putting a ton of cash away won’t hurt, but slow and steady is a perfectly acceptable strategy for savings.

If you can afford to save hundreds of dollars or more per month, don’t hesitate to do so. Filling up your emergency fund quickly means you can divert your contributions elsewhere once you reach your goal. But it’s okay to start with just a small, regular deposit schedule.

Consider saving $5, $10, or $20 per paycheck to get started. After a while, you’ll get used to that savings rate and can slowly increase it.

A lot of people choose regular savings schedules that are weekly, every other week, or monthly. When I had a regular day job with a predictable payday schedule, I matched my automatic savings and investments schedule to my paydays so the money would never really be available for spending.

Add tax refunds, gifts, bonuses, and other lump income

If you are lucky enough to get a bonus at work, cash gifts, or have your taxes set up in a way that you get an annual refund, you have even more opportunities to save up an emergency fund

Because you are used to living without those lump sums and they are not a part of your monthly budget, you can usually save 100% of major income events for big financial goals like an emergency fund.

Putting 100% of my bonus and tax refund from work helped me pay off my $40,000 student loans in about two years. If you are debt-free, you can save more aggressively in an emergency fund.

It’s okay to start small and build up your savings

Whether your savings goal is $1,000 or $10,000, it could feel very intimidating to set such a large savings goal. But don’t be intimidated. Even $10 or $20 per month can put you on the path to building a stable emergency fund.

One thing is certain: If you don’t start saving you’ll never reach your emergency fund goal. What’s most important is just getting started. The first dollar is the hardest dollar to save. Once you get your automated savings plan up and running, reaching your goal is just a matter of time.

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