How To Start An Emergency Fund For 18 – 30 Year Olds

As a young adult, there is a lot to figure out and get started on, especially when it comes to the financial side of adulting. One of those such things is an emergency fund or “rainy day fund” to help you handle financial emergencies and unexpected expenses. It is an important pillar in building financial stability and therefore one of the basic financial goals every adult should pursue.

To set up an emergency fund, start by figuring out how much you need to save in your bank account to cover multiple months of expenses. Then, you need to open and direct deposit that money in an account like a High-Yield Savings Account or money market account. Once you have the account open you need to create a funding plan, that will get you to the amount of money that you want to reach. It’s a simple process, but there are a few smaller important steps that I will explain in detail below.

Now, as a disclaimer nothing here is explicit financial or legal advice. This article is for informational purposes only so please do your due diligence before making any financial decisions.

So, with that being said, let’s dive right in and learn about setting up and creating an emergency fund savings plan to cover those unexpected emergencies!

What Is An Emergency Fund and Why Is It Important?

An emergency fund is for getting you through an unexpected loss of income or covering large unplanned expenses. So, if you have any unexpected medical bills, car repairs, or your water heater breaks, you can use your rainy day fund to pay for those things.

The emergency fund’s primary purpose is to ensure that you have the money you need to cover all your core financial expenses if you face job loss or large unexpected costs.

How Do You Set Up An Emergency Fund?

Figure out your fixed monthly expenses

Your first step is to begin with figuring out your specific goal amount for your emergency fund. If you don’t know your fixed monthly expenses, figure that out first. You will need to start tracking your regular expenses to see your monthly costs. This also means that you should have a monthly budget for yourself so that you can have a good idea of how much money you need to start saving up.

Therefore, if you don’t currently track your monthly expenses to the dollar, think about starting some type of system to track your spending habits on a regular basis.

There are plenty of apps out there that can help you do so. YNAB (You Need A Budget) is one app that makes the daunting task of budgeting much easier. I use YNAB and it is such an amazing budgeting app. It’s great for new adults and is a tool that can be used to help you set up a strong financial safety net.

If, interested here is my referral code to YNAB. You get a free 34 days to try out the software and see just what it can do for you!

Calculate your Emergency Fund Goal

Most people aim to have 6 -12 months of their overall expenses saved in an emergency account. So the actual dollar amount varies by person and their financial situation.

Since you are opening your emergency fund and probably starting from zero, only focus on saving up 3 months of your fixed monthly expenses for now. This is so that you can set smaller goals now that build up to a larger cash reserve as a long-term goal.

So, how do you find that dollar amount?

Multiply the number you calculated in when figuring out your monthly expenses by 3, and round up to the nearest hundred dollars. That value should be your first dollar amount goal as you begin funding your emergency fund.

For example, if I calculated that my fixed monthly expenses are $769 a month. I would multiply $769 times 3 which would give me $2,307. Next, I would round that up another $100 totaling $2,400. So my first emergency saving fund goal would be $2400.

Below is a chart detailing the same information in a more visual manner:

Start with Fixed Monthly Expenses (FME)	$769
Develop 3-Month FME Total: FME x 3	$2,307
Round 3 – Month FME Total Up for Total 3-Month Goal	$2,400

Note: As you reach your 3-month goal, increase your funding amount to 6 months of monthly fixed expenses, then 12 months of monthly fixed expenses. Once you reach 12 months, focus on funding the dollar amount of your variable expenses starting back with a 3-month goal.

Open High-Yield Savings Accounts (HYSA)

You want to put your emergency savings in a location that’s safe and accessible in case of an emergency. You also want to make sure that you are taking advantage of the best interest rates to grow your money.

There are a few good options out there but I’d argue that high-yield savings accounts are the best place to store emergency funds when compared to something like money market funds or certificate of deposits due to the easy access.

So, think about opening an online high-yield savings account and not a regular checking account to house your money. This type of separate savings account usually offers a higher interest rate compared to regular brick-and-mortar banks that only pay you a small amount of interest. Be sure to keep this as a separate account from your other accounts as an easy way to segregate your funds.

Note that sometimes a local credit union can be a good place to store your emergency fund based on a few other considerations. However, generally, a high-yield savings account is not something usually offered by a local credit union.

Read More: 16 Personal Finance Terms You Need To Know To Master Adulting 101

Online Banks Are Good For A HYSA

I use an online bank to house my emergency fund. It provides me with a higher interest rate than brick-and-mortar banks, and it is also easily accessible if I ever need to quickly transfer funds to cover unexpected events.

There are plenty of banks for you to choose from, so of course, do your due diligence to make the best financial decisions for yourself.

Most importantly though, Do not wait until you have the arbitrary “enough money”. Not putting the money in an account that could earn you interest puts you at a greater risk of the consequences of inflation. And no one usually wants their money to be worth less in the future than it is today.

So, open a high yield savings account today and put something in there to get yourself started, even if it’s just $5. Keep in mind that something is better than nothing – there is no shame in starting small, and it’s actually how most of us get started and grow our emergency funds. Of course, a reminder again to do your own due diligence when deciding where to place your money.

For some reason, a lot of people, especially younger adults, avoid this step because it seems overwhelming to save a lot of money quickly. Give yourself a break, if you want to save $500 in your emergency fund but only have $100 to put in it, guess what, you are still in a better position than someone who has no emergency fund set up or dollars in that account.

Being consistent with saving small amounts over time is what’s going to make you a financially successful individual. So get started!

Fund the Account and Develop a Funding Plan

Now, it’s time to actually add money to the account. Try to create a funding plan for yourself to consistently add money to the emergency savings account with each pay period. You can even set up automatic transfers to the account. Do what works best for you and your situation, just be sure to actually create and start a plan that can get you to your emergency fund goal!

If you aren’t sure how to go about creating an emergency fund savings plan, don’t worry I am about to talk about that next.

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How To Create An Emergency Fund Savings Plan

Above, we discussed what an emergency fund is and how to go about setting up an account for it. Now, we are going to talk about how to create a plan to fund the account.

Look at Your Budget And Figure Out How Much Money You Can Save Monthly

This whole process is about delayed gratification. You are saving money now to give yourself peace of mind for the future. That’s all it is.

So, start off by seeing where you can cut back, switch, or consolidate in an effort to give yourself extra money to save.

Do you have a side hustle that nets you some extra cash? Can you switch to a more affordable cell phone plan, pause subscriptions, or start couponing? These are only a few of the ways to try and open up your funds so you can start setting some money aside.

I will point out that budgeting software like YNAB makes finding gaps where you can save money much easier.

As you experiment and see where you can find some savings, remember to stay flexible. You don’t have to stick with the same money-saving method forever. Feel free to switch and see what works best and when.

Some money-saving tips work better depending on the season, like going to parks for entertainment during spring or summer. So keep an open mind during this step and remember any little amount saved helps.

Actually Put Your Savings Into Your HYSA

Do not overlook this step! It is an important part!

I know it will be difficult to let the money go and put it into a savings account instead of spending it. It’s tough. But you just have to remember the bigger picture.

Any savings you make need to be solidified by adding those savings to your, you guessed it, savings account. Otherwise, you’ll probably end up spending that money elsewhere which is not useful to your goal of building your emergency fund.

So if you save $30 on your cell phone bill each month, start putting that $30 into your HYSA? You were able to save $45.27 on groceries this month by couponing? Move that $45.27 in savings into your emergency fund account.

If at all possible, try and automate these savings, especially on things that are predictable and more permanent like the savings that come from switching to a more affordable cell phone plan. All in all, the more you embrace the search for savings, the more fun the process can be, and the quicker you can reach your savings goals!

Keep Saving Until You Are Fully Funded

Whatever your savings goal is, do not stop chasing it until you achieve it. Even after you achieve it, re-assess and see if you need to expand your goal. The general rule of thumb is to have 3 to 6 months of your basic living expenses saved up. Even if you never need that higher amount saved up, having emergency savings is just as much about having peace of mind as it is about surviving the sudden expense. So, better safe than sorry!

Roll With The Punches Adapt And Continue On

As you get into building up your emergency savings, you may find that it goes in a cycle – just when you get a nice balance built up, you’ll need to use it, and now you are back needing to replenish the account. It will be annoying – but don’t give up. You are working on a new habit and it is going to take time to fully develop and hone it. Eventually, you will reach an account balance that you never imagined you’d see.

Once you get there, that’s when you must remain strong in your saving habits and avoid the temptation to take unnecessary and costly risks – I’m talking about you high credit card balance. The sole purpose of an emergency fund is that it is there when you need it most.

Don’t Touch The Account!

Once you get to this point, it will truly be about avoiding the temptation of dipping into the account for those non-emergency reasons. No, an impromptu summer vacation is not a real emergency. Trust me. It seems fun and awesome in the moment, but if it deters you from saving when you need to most.

If you know that you will have an issue not touching the account create some barriers for yourself. A lot of people open their emergency savings account at a separate bank from their regular checking and savings accounts to help deter themselves from dipping into it. Anything you can do to forget about the account except when putting money into it is worth your consideration.

With some good planning and strong practice of delayed gratification, you can reach your emergency fund savings goal sooner than you might think. Just remember, a little here and a little there is better than none at all. Oh and that tax refund would look really great being completely saved for a rainy day.

So enough reading, time to take action!

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Best of luck adulting!

And Remember,

Adulting Starts Here

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