Emergency Fund Savings for SHTF, essentially means saving money and prepping for whatever happens in the future. It might be saving for a doomsday, or it might be saving for Tuesday. In either case, there are certain preps that you should always have money on hand.
The initial step towards organizing your finances is mastering the art of constructing an emergency fund. With some cash stashed away in the bank, you can sleep soundly at night, and more importantly, begin concentrating on long-term (and more exhilarating) financial objectives. This guide will furnish you with comprehensive knowledge on emergency funds, including advanced financial planning tips that can expedite the process of building one.
What Is an Emergency Fund?
An emergency fund is a reserve of funds designated to cover unforeseen expenses. These expenses may include car and home repairs, medical bills, and as a safeguard against reduced earnings or job loss. The most prevalent location to store your emergency fund is in a high-yield savings account, although some individuals also opt for money market accounts. While money market accounts may offer a higher APY, they are a type of investment account and therefore carry a risk of loss (although it is relatively low).
Why You Need an Emergency Fund
The principal advantage of possessing an emergency fund is that when unforeseen expenses inevitably arise, you can manage them without making substantial alterations to your existing lifestyle. At a fundamental level, having an emergency fund enables you to pay for a car repair so that you can commute to work. You can also fix your HVAC system if it malfunctions during winter, without having to resort to high-interest credit card debt that will take years to pay off. However, these are merely the primary benefits.
An emergency fund can instill a sense of financial security within you. It can mitigate the necessity of selling an investment during a market downturn (which is the worst possible time to liquidate it). Additionally, it can enable you to capitalize on unforeseen opportunities, such as covering the relocation expenses for a sudden job offer in a different city.
How Big Should Your Emergency Fund Be?
The standard guideline is to maintain an emergency fund equivalent to three to six months’ worth of expenses. However, personal finance should be tailored to your specific circumstances. Rather than relying on standard guidelines, let’s delve deeper to ascertain the appropriate size of an emergency fund for you.

The tremendous advantage of maintaining a sizeable emergency fund, such as a six-month reserve, is that it offers unparalleled security against a financial disaster. This encompasses the most dire circumstances, including an extended period of joblessness during a sluggish economy. However, the drawback of holding such a substantial emergency fund is the potential for lost opportunities. In particular, you may only earn a meager return on your cash, even with a bank offering a high-interest rate. On the contrary, if you maintain a modest emergency fund, you can funnel more funds into an Individual Retirement Account (IRA) or a 401(k) with an employer match, which promises a significantly superior overall yield.
One of the fundamental problems I have with the standard three-to-six-month emergency fund rule is that it fails to consider your potential income and expenses following an emergency event. Consider our worst-case scenario, a prolonged layoff in a dire economic environment. Additionally, assume that your present monthly expenses are roughly $5,000 per month. If you were to experience a layoff, could you efficiently curtail that $5,000 of monthly expenditures? Perhaps by terminating all extraneous subscriptions, significantly decreasing your dining-out budget, and taking into account the dramatic reduction in your gasoline expenses due to your lack of commuting?
Augment your Emergency Fund
Have you considered your income in the event of an emergency? Would you be able to recover a considerable portion of your income by obtaining high-paying gigs in the bustling gig economy? Alternatively, could you procure a traditional part-time job to bridge the income gap while you search for a sustainable employment opportunity? Furthermore, what about the potential for unemployment benefits to assist you during this tumultuous time?
These vital considerations are precisely why I ardently advocate for maintaining an emergency fund of no more than two to three months of your current expenditures. Naturally, this recommendation is contingent on the assumption that instead of depositing funds into your emergency fund, you’re investing them in lucrative ventures to boost your overall returns.
By accumulating a reliable emergency fund of two to three months of your current expenses, you’ll have comprehensive coverage for approximately 95% of typical emergency fund expenditures. These expenses may include costly automobile or home repairs, insurance deductibles, a short to medium-term job layoff, or an unexpected and urgent flight to attend a funeral. If you put away an additional three months’ worth of expenses, you might attain coverage for up to 98% of potential emergencies.
Life-Changing Events
Nevertheless, even with such robust coverage, you may still fall short of the necessary funds required to cope with an extensive and protracted medical condition that precludes you from working. However, in my opinion, the likelihood of such an event occurring is relatively slim, and there are alternative methods of protection available, such as disability insurance. As a result, it’s not worth sacrificing the opportunity cost of having three additional months’ worth of expenses locked away for a limited risk.
Ultimately, it is up to you to carefully contemplate the emergency fund equation. You must establish your unique rationale for maintaining an emergency fund, and meticulously proceed to scrutinize your worst-case scenarios in detail. As you perform this evaluation, it is essential to identify specific actionable steps that you can undertake should these worst-case scenarios indeed transpire.
Where Should You Put Your Emergency Fund?
The most commonly recommended location for storing your emergency fund is within a high-interest savings account. However, personally, I choose to employ a distinct account in a separate financial institution from my checking account. My preference for this strategy is not exclusively because I can acquire a superior interest rate; it is mainly due to my desire to limit access to my emergency fund. I want to ensure that these funds are exclusively utilized in genuine emergencies, and having them accessible via a mere instant transfer may lead to frivolous use in non-emergency situations.
Fortunately, various banking establishments offer reliable and trustworthy options for your emergency fund. Among them is CIT Bank, which is recognized for possessing one of the highest interest rates in the country. With a minimum initial deposit requirement of only $100, CIT Bank presents a dependable alternative for building up your emergency fund swiftly and efficiently.
When it comes to building up your emergency fund, there are primarily two approaches that you can adopt: reducing your expenses or augmenting your income. By spending less, you not only succeed in saving more money towards your emergency fund, but you also effectively diminish the total amount you would need to put aside. Consider this hypothetical scenario: Your objective is to accumulate a three-month emergency fund, and your regular monthly expenses amount to roughly $5,000. This implies that you would need to amass a total of $15,000 in your emergency fund.
Save More, Spend Less
Nevertheless, what if you were able to reduce your monthly expenses by $1,000, bringing them down to $4,000? In this situation, not only could you save more money, but you also significantly lower the amount you have to accumulate to achieve your three-month emergency fund target, reducing it to only $12,000.
However, the critical question to consider at this juncture is whether you can feasibly reduce your average monthly expenses by $1,000, or perhaps even more. This is a crucial consideration, as it requires a thorough evaluation of your current expenditures and a willingness to make potentially challenging lifestyle changes to achieve your financial goals.
Cutting Back
If you are trying to cut $1,000 or more from your monthly expenses in a short amount of time, you will need to focus on making significant changes. While commonly recommended tips such as bringing your lunch to work or skipping daily lattes can help reduce your monthly expenses, major wins are typically found in significant expense categories such as housing, transportation, interest payments, and food.
When it comes to housing expenses, moving may not be an option for everyone. However, refinancing your mortgage, finding a roommate to split costs, and negotiating a lower home insurance rate can be smart ways to save quickly. In terms of transportation, you can shop around for auto insurance, refinance your auto loan to lower your monthly payments, and consider trading down in car value to cut costs.
Reducing the amount of interest you pay each month should be a priority. Eliminating high-interest debt should be your first step, and beyond interest payments, refinancing your debt via debt consolidation can also help reduce your costs. Lastly, optimizing your grocery budget and eliminating eating out will help you save the most within your food budget. Although this can be challenging, it can be helpful to remember that cutting these expenses is a temporary action and that you don’t have to give them up altogether nor forever.
Increasing your income
To increase your ability to save for your emergency fund, it’s important to expand the difference between your income and expenses, also known as “Growing the Gap”. To achieve this, you can either reduce your expenses or increase your income. For instance, if your emergency fund goal is $12,000, and you save $1,000 each month, it will take you 12 months to achieve that goal.
However, if you increase your income by $1,000 per month, to reach a point where you earn $6,000 each month and spend $4,000 each month, you can have a gap of $2,000. This means that you can now achieve your goal in just six months. The beauty of earning more money is that it can become easier as you gain more experience in your profession. For example, if you are a beginner freelance writer earning $1,000 a month, you can increase your income as you build your portfolio and enhance your writing skills. Increasing your income is a powerful way to achieve your emergency fund goals in less time.
Should You Invest, or Grow Your Emergency Fund?

When it comes to managing your finances, it’s essential to have a safety net to protect you from unexpected expenses. Starting with a small fund of around $1,000 can be a good way to begin. However, once you have this in place, the question arises of whether it’s better to build up your emergency fund or start investing. But before we jump to any conclusions, it’s important to note that you don’t necessarily have to choose one over the other.
One strategy is to start investing in your 401(k) up to the employer match and then using the remaining funds to build up your emergency fund. This approach allows you to take advantage of the employer match, which is essentially free money. While it may take longer to achieve a fully funded emergency fund, you’ll be making progress in both areas.
Ultimately, the decision to invest or build up your emergency fund more aggressively depends on which approach will benefit you the most. It’s crucial to revisit the purpose of your emergency fund and evaluate your financial situation to determine the best course of action. Taking the time to assess your goals and priorities will help you make informed decisions that align with your long-term financial plans.
Can you use your Roth IRA as an emergency fund?
One of the most important concepts to understand for building long-term wealth is that retirement accounts such as 401(k)s and IRAs are limited “use it or lose it” accounts. In other words, each year there is a cap on how much an individual can invest in these accounts, and if that amount is not reached, there is no way to recoup it. This underscores the importance of being proactive when it comes to retirement planning.
When it comes to Roth IRAs specifically, there is a noteworthy rule to keep in mind. Namely, contributions to a Roth IRA can be withdrawn at any time, without penalty or tax. However, once withdrawn, that money cannot be put back into the account.
Overall, there are a few different scenarios in which using a Roth IRA as an emergency fund might be a wise strategy. For those just starting out, it can make sense to simultaneously invest and build up an emergency fund. In this case, an individual might consider contributing $500 per month to both a savings account and a Roth IRA. Initially, the Roth IRA funds could be invested in cash, allowing the emergency fund to grow while earning some interest. Once the emergency fund is fully funded, the cash in the Roth IRA can be transferred to a more appropriate investment, such as stocks.
Alternatively, for those who have already built up a substantial balance in their Roth IRA, it may make sense to use it as a backup to a smaller emergency fund held in cash. For example, an individual might carry only two months’ worth of living expenses in cash, while relying on their fully funded Roth IRA as a last resort.
Building an Emergency Fund from Scratch
But what about those who don’t have any money to start an emergency fund in the first place? Building an emergency fund from scratch can seem daunting, but it’s certainly possible. One option is to start by setting a goal for how much you want to save, and then breaking that goal down into manageable chunks.
For example, if you aim to save $1,000 for your emergency fund, you might set a goal to save $100 per month for 10 months. Another option is to investigate how to cut back on expenses to redirect those funds towards your emergency fund. Finally, consider taking on some freelance or part-time work to bring in additional income that can be put towards your emergency fund. With perseverance and a solid plan, anyone can start building an emergency fund, even from scratch.
It Just Makes Cents
The crucial factor in initiating an emergency fund when you’re living on a tight budget is realizing the significance of small, but meaningful victories. It may appear insignificant, but if you have only one lonely penny to tuck away, then go ahead and do it. Saving whatever you can, even if it’s merely a few cents, represents the primary stride towards cultivating the habit of saving.
Adopting the deliberate approach of assigning a portion of your income for a specific objective, whether that’s an emergency fund or an investment account, enables you to alter your perception of your relationship with money (and how you spend it). So it’s acceptable if you have very little to save right now. Begin where you are and gradually increase your savings.
Savings Account Strategy
One effective strategy to ensure that you only tap into your emergency savings in a genuine emergency is to establish a level of separation between yourself and your rainy day fund. One way to achieve this is by setting up a separate online savings account that is distinct from your primary bank account. This separation helps to create a mental barrier between your day-to-day spending money and your emergency savings, making it less tempting to dip into your rainy day fund for non-emergency expenses.
Online savings accounts can be a great option for emergency funds since they typically offer higher interest rates and fewer fees compared to traditional savings accounts. Additionally, savings accounts are not equipped with debit cards due to federal regulations that limit the number of free withdrawals you can make in a billing cycle. This means that by keeping your emergency savings in its own silo, it becomes more difficult to spend that money impulsively. Transferring money from one financial institution to another requires a bit more effort and intentionality, which can serve as a useful reminder that you are dipping into your emergency fund and should do so only when absolutely necessary.
Alternatively, consider using a service like Acorns, which offers free online bank accounts. Acorns has two valuable features — roundups and paycheck withdrawals — that can make saving small amounts easier. With the roundups feature, Acorns rounds up your debit card purchases to the nearest dollar and sets aside the “spare change.” With paycheck withdrawals, a set portion of your income is automatically put into savings each pay cycle.
Alternative Savings Strategy
In my previous experience, I have utilized a savings plan that involves systematically saving each $5 or $10 bills, and placing them in a secure location. This might be a concealed book safe, or a deceptive hiding spot like a disguised shaving cream can, or an electrical socket. While it may require some patience, this strategy has proven to be effective in generating monthly savings ranging from $100 to $300. This approach is especially beneficial in building an emergency fund that can be easily transported in a go-bag. The accumulation of smaller denominations will prove useful during situations where electronic payments or credit cards are not accepted, enabling one to navigate through the unexpected with greater financial security.
Bottom Line on Starting an Emergency Fund
Start building your emergency fund today. Even a small $10 deposit can provide you with financial stability and peace of mind. As you continue to save, you’ll gain momentum and soon find that saving becomes a source of pride. Achieving your savings goal will not only improve your sleep, but also provide a solid foundation for your financial future, allowing you to pursue bigger and better things.