Home > 2015 > Personal Finance

How to Build the Perfect Emergency Fund for You

Advertiser Disclosure Comments 1 Comment

Just a few days ago, I was surprised to discover my clothes dryer had completely stopped working. The machine had no other signs of wear and tear and was only a couple years old. To make a long story short, after a quick call and visit from the repairman, I found myself stuck with a $200 bill! Luckily, with the help of my emergency fund, I was able to cover the expense without falling back on credit cards or disrupting my regular take-home pay. It’s like nothing even happened.

Unfortunately, many people aren’t adequately prepared to manage paying for an unexpected expense or emergency. According to the Federal Reserve’s 2014 Survey of Household Economics and Decisionmaking, 47% of Americans say that they wouldn’t be able to cover a $400 emergency expense. That lack of preparedness could lead to maxing out credit cards, taking out expensive short-term loans, or worse. So to help you better manage the unexpected, here’s my guide to putting together the perfect emergency fund.

Start Small

While you should eventually build an emergency fund that can handle more serious emergencies (economic downturn, loss of job, etc), you’re going to want to start by putting together a short-term emergency fund. Your short-term fund is meant to take care of unexpected expenses that, while not severe, can still mean trouble if you aren’t prepared. Things like a car repair, replacing a broken window, or getting a parking ticket are all things that can be covered by your short-term fund. Ideally, you’d want this to range anywhere from $500 to $1,000.

Figure How Much You’ll Need in the Long Run

Chances are, if you find yourself out of work, the victim of a natural disaster or unable to work for any reason, $500 to $1,000 won’t be enough to keep your head above water. So to make sure you can keep you (and your family) financially stable for an extended period of time, it’s best to save anywhere between three to six months’ worth of expenses. That may sound like a lot of money (and in most cases it is) but believe me, having something to fall back on will make your recovery process all the more easier.

Building yourself a budget is a great way to figure out how much you should aim to save for a long-term emergency. Figure out what expenses you’d really need to be covered (food, shelter, major utilities) and which you can do without for a short period of time (cable bill, online subscription services, etc). Once you get that number, you can start working out a savings plan for yourself depending upon how much you’re able to sock away each paycheck. It might take a lot of time, but having a specific number in mind can really help to keep you motivated.

Tighten Up Your Budget

If you’re struggling to come up with money to put away for an emergency fund, there’s no better way to boost your cash flow than by tightening up your budget. Writing a concise list of your needs and wants can help you identify what areas of your budget you can cut back on. Think of all the extra money you could save just by cutting back on dining out or going without Netflix for a couple months. Once you’ve met your savings goal, you can transition back to your regular spending habits with the peace of mind that you’ll be able to handle almost anything that comes your way.

Drop Your Debt

While you’d ideally want to take care of both simultaneously, paying down debt and saving money isn’t something that’s feasible for everyone. In situations like these, it may be in your best interest to prioritize paying down your debt. The longer you carry debt, the more interest it builds and the more you’ll have to pay over time. Taking on high-cost debt (credit card debt, for example) can also be an emergency in and of itself and be a huge drain on the emergency fund you worked so hard to build.

Furthermore, carrying a high balance on your credit card can have a negative impact on your credit. And the lower your credit score, the more likely you are to get higher interest rates on future loans and credit cards. You can see how your debt is affecting your credit scores for free on Credit.com, with updates every month so you can track your progress.

Getting out of debt, and avoiding unnecessary forms of it, can help you maximize your contributions to your emergency fund and ensure it’s there for when you really need it.

Most people don’t realize how important an emergency fund really is until they’re actually faced with a serious emergency. Putting in the time and effort to build an adequate emergency fund is a simple way to make sure you and your loved ones won’t fall into debt. So do yourself a favor and take the time to evaluate your expenses, build a budget, and start saving today!

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Silvio

    Probably should’ve bought a $7 thermal fuse for the dryer and fixed it yourself.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team