How to Build an Emergency Fund

How to Build an Emergency Fund (And What to Do When Disaster Strikes Without One)

This is a sponsored post on behalf of Nillify. All opinions are my own.

I probably don’t need to be the one to tell you that life happens. Normally when you are least expecting it and least prepared for it. I mean, that’s just how it goes, right?

Wrong. You don’t have to go through life wondering when the next car repair or medical bill is going to derail your finances. Because that is a super stressful way to live, and you shouldn’t have to be in a constant state of worry!

The best way to avoid a financial setback from quickly turning into a catastrophe is by being prepared with an emergency fund.

But if the unexpected has already struck and you are left without an emergency fund, you don’t have to turn to credit cards or God forbid, predatory payday loans.

Keep reading to find out how to be prepared for financial setbacks and what to do if you aren’t quite there yet and need help fast.

Why You Need an Emergency Fund

Unexpected medical bill? Car repair? Furnace breakdown in the dead of winter? Dental expenses? If you have yet to experience one of these things popping up when you least expect it, then consider yourself lucky!

But the truth is, if it hasn’t happened yet, some unexpected expense will always come up. It is up to you to decide whether you want it to be catastrophic or just a minor inconvenience.

These unexpected expenses are EXACTLY why you need an emergency fund. By setting aside a chunk of change to be used only for emergencies (and no, a new outfit is NOT an emergency), you will be setting yourself up for a better financial future.  

The scary thing is that 66% of millennials don’t have any kind of backup plan. Do you?

When bills pop up, you may find yourself in a terrifying and stressful situation. Maybe you’re already there. Wondering how on earth you are going to get through this.

What to Do if You Don’t Have an Emergency Fund

If you’re reading this post in the midst of a financial emergency and you don’t have an emergency fund, don’t panic. You do have some options.

1. Ask for Help

I know, I know, asking for help can make you feel even worse about an already bad situation! Especially when everyone constantly tells us millennials how financially irresponsible we all are. Don’t even get me started on that!

And I also want to point out, not everyone is lucky enough to have access to a support network that may be able to help them out financially.

But if you do have a good network, and are confident you can either pay someone back or are fortunate enough to have someone who could gift you the money you need, then this may be an option. If you are willing to swallow your pride.

2. Sell Things You Don’t Need to Cover Emergency Expenses

When Joel and I were getting ready to transition into our RV fulltime, we sold a LOT OF STUFF! It took us a little while to move things out with our online garage sale, but when all was said and done, we earned about $2,000.

That is quite a chunk of change and could definitely go a long way in a financial emergency. If you need to make money fast, selling that junk you’ve been meaning to go through anyways can be a wonderful option.

3. Get a Short Term Loan if You Don’t Have an Emergency Fund

Alright, this is where you can be ok, or where you can wind up in a really awful position. So PLEASE read this section carefully!

It is no secret if you have read anything on my site that I hate debt. Like with a potentially over-the-top passion.

So I don’t advocate going into debt, but I also realize, that life happens and sometimes you just can’t avoid it. Emergencies DO happen, but that doesn’t mean your finances need to be destroyed.

If the car you need to get to work to put food on the table breaks down, you need to get it fixed or you’ll lose your job. If you don’t pay your medical bills, they may be sent to collections. These things will have a long-lasting impact on your financial future in so many ways.

So as much as I hate debt, sometimes you gotta do it. But, even in an emergency, you can avoid bad debt.

What is Bad Debt?

What do I mean by bad debt? First, credit card debt. That stuff is bad news.

The average interest rate for a credit card is just under 20%. But if you have poor or no credit (cough cough, millennials) your rates are likely to be even higher! This is the whole reason so many people get stuck in a vicious cycle of credit card debt.

The interest is so high it can be extremely difficult to pay off. Plus, the longer you have the debt, the more interest you’ll owe. Bad debt can easily make you feel trapped.

I know there are credit cards that offer 0% interest for a period of time. However, generally, you have to have very good to excellent credit to access such cards. If you don’t you’re going to get slapped with the more typical double-digit interest rate.

And if you do qualify, make sure you pay off the debt before the 0% interest term expires. Otherwise you will be very sad when the rates increase dramatically.

The second type of debt that is even WORSE than credit card debt is a payday loan. Payday loans prey on people in desperate financial situations when they don’t have an emergency fund in place.

The interest rates on these suckers average 400% plus finance charges! No, that 400% is not a typo. It is a sick, sick, fact that makes me cringe when I think about it. You do not, EVER want to take out one of these loans. EVER! Ok… moving on.

Alternative Borrowing Options

So what should you do if you find yourself without an emergency fund when you need one most? You have a couple of options.

One option is to get a personal loan from your bank. These loans generally have fairly competitive interest rates, however, you have to have a good credit score to qualify for them.

If you aren’t able to qualify for a personal loan, Nillify offers a better option to the bad (need I say terrifying) debt options I mentioned above. That is why I am so excited to be able to partner up with them!

When I learned about their company, I was SO excited. There are thousands of people every year who fall into the cycle of bad debt. Thankfully, there is FINALLY a company out there who is going to put a stop to it by offering a better way out.

Nillify was created specifically to help people avoid bad debt, especially if you don’t qualify for traditional personal loans.

Their CEO has seen in his own life how families can be ruined by this kind of debt. So he is on a mission to do something about it, starting with you!

Nillify doesn’t take advantage of your dire financial situation and less than ideal credit score. Instead, they offer interest rates you can actually afford! Plus they determine your ability to pay back your loan based on data obtained from your connected financial accounts rather than a FICO score.

This is good news if your credit score is less than ideal. Maybe you simply haven’t established it or you made a couple of bad choices early on. Nillify also works WITH you to ensure you are able to pay back your loan.

Run into another financial snag during repayment? Nillify will work with you to make your payments more affordable for a few months while you get back on your feet.

It is really awesome and a much better alternative when you find yourself without a financial backup plan. So if you’re tempted to put those emergency expenses on a high-interest credit card or take out a predatory payday loan, you’ll definitely want to check Nillify out instead.

Still, your best bet is to create a safety net before something happens, so keep reading to learn how to build up your emergency fund.

Target Emergency Fund Size           

So hopefully I haven’t scared you off yet and you are still here to figure out how to build your emergency fund so you don’t find yourself sucked into a cycle of bad debt.

I’m a fan of Dave Ramsey and followed many of his baby steps as Joel and I were paying off our $60,000 of debt. His first baby step is to save $1,000 for an emergency fund.

This amount of money wouldn’t do much if you faced significant medical expenses or a prolonged job loss. But for the day to day unexpected things like car repairs, small home repairs, etc., that $1000 can totally save your butt.

Ideally, you’ll want to have more like 3-6 months of expenses saved up. Since the amount of money you need for your emergency fund is based on your typical spending, there is no magic number for how much to save.

This is why it is so important to track your expenses and budget so you know how much you need if you were to go several months without income. If your job is unstable or you are a one-income household, you’re going to want to have more saved.

On the other hand, if you and your partner both work at stable jobs you might be safe with a smaller emergency fund (closer to the 3-month end of the spectrum) since it is less likely that you would both experience a loss of income.

If you don’t have a budget to know how much you need to have saved, my free budgeting email course for beginners will help you start taking steps in the right direction.

How to Build Your Emergency Fund

One of the best ways to build up your emergency fund and continue to save more money every month is by lowering your expenses. There are tons of ways you can save money on everyday expenses, food, and more.

Maybe you can cut back on discretionary spending for a few months to build that savings account up. It isn’t always fun to cut back, but you will be SO much happier when you don’t have to stress about money and what would happen to you if you experienced an emergency.

Another way to build up your emergency fund is to make more money. There are lots of great side hustles that are flexible and can easily be incorporated into your life even if you have a full-time job.

While it is great to make lasting changes that will have a positive impact on your finances for the long haul, if you currently have no money in the bank, it’s time to get intense.

Do whatever it takes for the short term to get at least $1,000 in the bank as fast as you can, and then continue to maintain as many of those changes as you can to build up even further from there.

A Short Story About My Emergency Fund

I recently had to tap into my emergency fund for some unexpected medical costs to the tune of about $1800.

That’s a lot of money! What’s worse, I just ran my numbers through this credit card payment calculator.

If I were to pay the minimum payment (assuming a 20% interest rate and 3% of the balance to be the minimum payment), it would take me 12 YEARS to get rid of that debt.

To make things even worse? I would have to pay MORE in interest than the original $1800 cost.

Instead, I just pulled it from my emergency fund as was a little annoyed rather than strapped with debt for over a decade of my life.

As you can see, having a financial backup plan like an emergency fund or accessing a short-term, low-interest rate from Nillify, will put you in much better financial shape than if you pay for unplanned expenses with a credit card or a payday loan.

Best Places to Keep your Emergency Fund Money

So, once you have your 3-6 months of expenses saved up (or more if you feel you need it for your particular financial situation), you’re probably wondering where to save it.

You could stick it in a traditional bank account, however, you’ll probably earn a lousy 0.1% interest or something similarly awful. Not even enough close to being able to keep up with inflation over time.

You also don’t want to invest your emergency fund into something that is not liquid, like a retirement account. However, some people do choose to invest in a Roth IRA.

You can withdraw your contributions penalty-free, but you have to have had the money in there for at least 5 years.

So opening up a brand new account and then plopping your emergency money into it isn’t something you’ll want to do. If you already have a 5-year old Roth, it is something to consider.

However, there is the risk of losing this money if the stock market were to tank. So if you can’t afford to lose it, don’t put it in the market.

Probably the best bet for keeping your money safe is to put it into a high-interest savings account. Nowadays, more and more online banks are offering high yield accounts where you can earn 2-3% on your money in a risk-free, FDIC backed account.

You should also check with your local credit union regarding what kind of accounts they offer. I was lucky to score a 4.07% interest rate checking account at my local credit union, so that is where my emergency fund is going to hang out.

Emergency Fund Review

Here’s a quick review of key takeaways that will make for a happier, less stressful financial future.

Emergencies happen, it is just a fact of life. So it is best to be prepared for the unexpected by having 3-6 months of expenses saved up in an emergency fund that you keep in a high-interest savings or checking account.

If you don’t have your emergency fund built up quite yet and find yourself in a sticky situation, avoid high-interest debt like credit cards and payday loans. These will only suck up more and more of your hard-earned money with astronomical interest rates.

Instead, ask for help if you have someone in your life in a position to support you in an emergency, sell things to make some extra money, or check out a low-interest personal loan from your local bank if you qualify.

And if you need help quickly and don’t have an emergency fund, remember Nillify. You can feel confident taking out a loan with them knowing that their company was founded to help people just like you!

Having an emergency fund and a backup plan ready to go in case of a financial crisis should be part of everyone’s personal finance goals. If you haven’t started, don’t panic, but make a plan to get yourself in a better position before trouble comes knockin’.