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7 Practical Tips for Building (Or Rebuilding) Your Emergency Fund

How much money you need, and how can you get it

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Your fridge isn’t freezing, your car isn’t running, you suddenly aren’t working. It can be hard to deal with just one costly event, not to mention several all at once. Yet stuff like this happens every day. Life can be tough — but much easier if you have a cash reserve to cover unexpected expenses.

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Tips for Building an Emergency Fund

“Emergency funds are incredibly important because it keeps people from running up credit card debt or pulling money out of retirement accounts to pay for things, both of which can be devastating to your finances,” says Matt Stephens, a certified financial planner (CFP) at AdvicePoint LLC in Wilmington, North Carolina.

During what he called “the year that everything broke,” one of his clients had to repair or replace his lawn mower, irrigation system, garage door, washing machine, garbage disposal, microwave and refrigerator. The client's wife also had major surgery, with out-of-pocket expenses over $10,000. “Fortunately, they had a fully funded emergency fund, so they were annoyed, but not devastated.”

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“It’s not a matter of if something will go wrong, but when,” says Thomas Scanlon, a CFP at Raymond James in Manchester, Connecticut. “But if you know that you have money in the bank, you won't be up all night worrying.”

Lessons from the pandemic

The effects of COVID-19, fires in the West and hurricanes in the East have further underscored the need for a cash stash. According to a June 2020 survey by the U.S. Census Bureau, most of the adults who received a stimulus check from the federal government say they used it, or intend to use most of it, for basic household expenses such as food, rent, mortgage payments and utilities.

What’s more, an emergency fund can help folks stay the course when the markets drop precipitously, as they did the in spring 2020, says Bradley Lineberger, a CFP at Seaside Wealth Management in Carlsbad, California: “Instead of selling your wonderful investments at fire sale prices during bear markets, you can dip into your reserves to get by. You can let your stock investments recover and continue growing.”

Yet, according to a survey by released in July, only 44 percent of Americans have enough savings to cover three or more months’ worth of expenses. What’s more, 25 percent say they have no emergency fund at all, up from 21 percent in 2020. And 51 percent of those polled by Personal Capital, a financial website, say that having a rainy day fund is a greater priority than it was before the pandemic.

Still, with multiple demands on your income, you may be wondering how to create a cushion, or add to the one you have. Good question. AARP asked financial planners from around the country for their advice and best tips for finding the money.

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1. How much do you need?

If your job provides a stable, consistent paycheck, six months of living expenses may be adequate for an emergency fund, says Ashley Folkes, a CFP at Bridgeworth Wealth Management in Birmingham, Alabama. “If your paycheck fluctuates, then we recommend nine months.” 

That's for a worst-case scenario: You've lost your job and need to rely on savings for paying basic expenses. In some cases, a more modest fund will do. Mark Ziety, CFP at WisMed Financial in Madison, Wisconsin, says the fund size should also be determined by the potential for an emergency to occur. For example, a retired couple renting an apartment in a retirement community has Social Security and pension income. They won’t have a job loss or home repairs. “Health care expenses may be their biggest financial concern, so an emergency fund that covers their potential out-of-pocket costs may be enough,” he says.

2. Start with direct deposits, adding ‘found money’

You don’t have anything close to that much in cash? “Don’t beat yourself up,” Scanlon says. “Slowly add to this fund over time.” Set a reasonable goal first, perhaps $1,000, which would cover a wide range of costly yet annoying emergencies — new tires, a dishwasher, some out-of-pocket health insurance costs. Create a separate savings account, and begin making direct, regular deposits, no matter how small. Add any overtime pay, bonuses and tax refunds you receive, Scanlon suggests.

3. Cut expenses, reduce debt, look for a side gig

Next, rework your budget, and lower your bills as you can. Use cash, not credit, and pay down your credit cards. Take a list to the grocery store to avoid impulse purchases, and cook at home rather than eat out. Cancel the subscriptions and automatic purchases you don’t need. Lower your cable bill by cutting back on premium channels and switching to free TV and movie offerings. Find a side job that you will enjoy. Folkes also suggests looking for things to sell. “If you are like me, you accumulate a lot of stuff. The internet has made selling easy, and you can use the proceeds to build your fund.” Make use of the many apps available for this purpose.

4. Consider cash alternatives

Keep in mind that your reserves can take many forms. Benjamin Offit, a CFP at Offit Advisors in Columbia, Maryland, suggests a home equity line of credit (HELOC), nonqualified investment and brokerage accounts, a 401(k) loan or even securities-backed lines of credit. George Gagliardi, a CFP at Coromandel Wealth Management in Lexington, Massachusetts, recommends looking for “fast liquidity,” without large tax bills or interest charges. “Your fund could include low-yielding bond funds; bonds without withdrawal or sale penalties; savings and checking accounts; and even CDs if you can cash in a sufficient amount once without an onerous penalty.”

5. Combine your fund with a health savings account (HSA)

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​If you qualify, you can supplement your emergency fund with an HSA. Nadine Marie Burns, a CFP at A New Path Financial in Ann Arbor, Michigan, is glad she did. In spring, when she and her husband found mold in their home, he was hospitalized for four days. The price: More than $22,000 to cover his medical treatment (his full annual deductible), a new furnace, air conditioner and humidifier, and mold remediation. “Without an emergency fund and an HSA, this would have set back our retirement goals for over a year. But we paid the hospital with our HSA account and used money in our emergency savings for a new furnace. The cost for mold remediation was reimbursed partially by our homeowners insurance.”

6. Leave this money alone

​With some discipline, your fund is beginning to grow. But with the holidays approaching, you may be tempted to buy something you really want for yourself or a loved one. Be careful; don’t sabotage your goal — and your future — by spending your stash impulsively. The key is to continue to be disciplined. You only want to access this money in a true emergency, not to pay for your next vacation.

7. Replenish any funds you must withdraw

​​Finally, Burns and her husband have learned the importance keeping their fund intact. “We are rebuilding our emergency savings for the next thing to come. I cannot imagine the stress we would have had if we didn’t have the funds to handle a major health situation quickly and efficiently.” Now, she says, the couple is looking forward to a healthy future. ​

Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.

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