3 Step Process to Create an Emergency Fund

Updated: Nov 10, 2021

I am sure you have heard about Emergency Funds and how important they are to financial freedom; but do you know how to start building yours? Sure, the surface level concept makes sense – save money for your monthly bills in case of an emergency. But, finding the cash to save each month on top of bills, debt, and everything else life throws your way can be a daunting task!

When thinking about Emergency Funds, try thinking about all those songs that tell you to save sunshine to be used on a cloudy day. Although saving sunshine isn’t quite as feasible as saving cash, they both serve the same purpose. One day, you may encounter a particularly horrible day or circumstance. This situation could range from an unexpected medical emergency, major home repairs, or job loss.

When these situations arise, our financial goals may need to shift dramatically. But if you have a properly financed Emergency Fund your financial goals and daily lifestyle may not have to change at all!

Now that you understand the importance of Emergency Funds and their purpose, here are five steps to create yours!


Step 1: Calculate Monthly Living Expenses

Congratulations! You’re officially embarking on your journey towards financial freedom. The first step of creating your emergency fund is listing all your monthly expenses. Although everyone has different expenses, most fall into the 8 categories below:

  • Monthly Rent or Mortgage Payment

  • Monthly Utility Payments (Gas, Electric, Water, Garbage, etc.)

  • Monthly Telecommunication Payments (Phone, Cable, TV Subscriptions, and Internet)

  • Monthly insurance Payments (Car, Health, Short Term, Long Term, Home, etc.)

  • Monthly Transportation Costs (Car Payment, Gas, Public Transit, etc.)

  • Monthly Debt Payments (Credit Cards and all other loans except Mortgage)

  • Monthly Grocery Expense

  • Monthly Miscellaneous/Other Expenses (Pets, Childcare, Doctors Visits, etc.)

Once you have compiled your list of monthly expenses write down your total. Here is an example to follow:

As you can see from the table above, my monthly expenses would be $2,950.


Step 2: Evaluate Lifestyle and Employment Status

Now that we know how much our re-occurring monthly expenses are, it is important that we evaluate our lifestyle and employment status. One of the worst things that could happen initiating the use of our emergency fund is losing our job.

Unlike an unexpected medical emergency, family emergency, or home repair losing your job would result in an extended amount of time without income.

To ensure that we are building an emergency fund that could support us in the instance of job loss, you need to evaluate how secure your job is. Here is a general rule of thumb

  • Secured Job – You fall into this category if you could easily find a new job if you lost your current job. Your position is stable, and your employer would have a hard time replacing you. (Ex. Salaried Positions)

  • Vulnerable Job – You fall into this category if it would be difficult for you to find a new job if you lost your current one. You consider your position somewhat stable, but you anticipate income fluctuation as well. (Ex. Seasonal workers, gig worker, or an artist).

  • Risky Job – You fall into this category if you currently have a niche position that is not commonly found at other similar businesses. You consider your position stable, but you have a higher income than typically offered at similar businesses.

Once you have decided which category your job falls into, it is important to conduct a similar analysis of your lifestyle. Here are the three main categories:

  • Easily Sustained – You fall into this category if you are relatively healthy, don’t have much debt, currently renting, and you do not have any dependents. These factors dramatically decrease your monthly bills and reduce the risk of a lot of emergencies.

  • Harder to Sustain – You fall into this category if you live in a higher cost-of-living area, you own a home, you have dependents, you have pets, you have a medical condition, or you lack financial support. These factors dramatically increase your monthly bills, and you are more likely to encounter certain types of emergencies.

  • Risky to Sustain – You fall into this category if you are the sole provider for multiple dependents, you are retired, or if you have a medical condition. These factors dramatically increase your monthly bills, and you are more likely to encounter emergencies without the support of another person’s income.

Now that you have a better idea of which job and lifestyle category you fall into, it is time to calculate how large your emergency fund should be! Here are the general guidelines:

  • Secure Job and Easily Sustained Lifestyle: 3-4 Months of Living Expenses

  • Vulnerable Job and Harder to Sustain Lifestyle: 5-7 Months of Living Expenses

  • Risky Job and Risky to Sustain Lifestyle: 8-12 Months of Living Expenses


Step 3: Start Saving

Ok, so the easy part is over. You now know how much your reoccurring monthly bills are and you know how much you should save for your Emergency Fund. Now comes the hard part – saving your money!

Like I mentioned before, saving money is usually easier said than done. Most of us have a lot of competing priorities, wants, desires, and needs that eat up a majority of our income each month. How are we supposed to save 3-12 months’ worth of expenses when we barely have any income left over each month? Here are three tips:

  • Cut Down on Unnecessary Expenses: Yes, we all love Netflix, Hulu, and all the other TV streaming platforms, but do we really need all of them each month? If you are currently subscribed to multiple subscription services, consider pausing all but one! Doing something this small may end up saving you $10.00 - $50.00 per month!

  • Compare Insurance Rates: One common mistake when it comes to insurance is buying a plan and sticking with it forever. There is a reason all these different companies exist and promote those funny and catchy commercials all the time. Every six months or so go ahead and submit online quote requests at competing insurance companies and see what types of rates you get! Often you will receive a quote that is 10% – 20% less than what you currently pay!

  • Stop Eating Out: If your monthly groceries bill is higher than you expected and is largely comprised of Taco Tuesday meals at your local restaurant, Chick-Fil-A sandwiches, and Chinese Takeout it is time to consider cutting back on eating out. Although eating out can be more convenient, it is harder on your wallet and your body than you think! Instead of buying food out, consider making a weekly shopping list and setting your maximum spending at $50.00 per person in your household. Following this tip will help you cut back on your food expenses dramatically!


As you now see, Emergency Funds are necessary for financial freedom. Without them, you will likely not be prepared for financial emergencies as life throws curve balls your way. By taking these 3 proactive steps you can start working towards a future filled with certainty instead of uncertainty.



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