my two cents

How Do I Save Up an Emergency Fund?

Photo: Harold M. Lambert/Getty Images

I know I’m supposed to have an emergency fund, and I want to make that happen this year. However, I’m not really sure how to go about it. I feel like I can barely pay my bills as it is, and I’m still working my way through some credit-card debt that I built up when I first moved to New York in my early 20s (I’m now 27). I paid off about $5K of it last year, but I have about $4K left. I also have private student loans that I’m paying at the same time. How do I balance all of these? Should I even bother trying to save while I still have credit-card debt, or is it better to tackle things one at a time? 

Emergency funds get a lot of fanfare. And rightfully so! You can’t argue with the fact that having some extra cash lying around is helpful when the world goes to hell. But the problem with emergency funds is that they are great in theory and very, very difficult to put into practice. And that’s why most people never get around to saving one — they’ve got more urgent financial demands than a hypothetical rainy day.

But it’s also important to learn how to multitask with your money, and toggle between competing short- and long-term priorities. I’m not saying it will be easy or quick, but the good news is that it doesn’t have to be that complicated. Once you make a plan, you can (and should) put most of the process on autopilot — and then be patient.

First things first: Congratulations on paying down more than half of your credit-card debt. Sallie Krawcheck, the CEO of the financial advisory platform Ellevest, once told me that consumer debt was “poison” for your finances and you should treat it accordingly. With that in mind, I recommend rolling your remaining balance onto a zero-interest credit card (also known as a balance-transfer card), which will give you a limited time window where your debt won’t accrue interest and you can get rid of it even faster. Be strategic about making sure you can pay it off within that window, because once it’s closed, the interest rate will skyrocket again.

In the meantime, figure out how big your emergency fund should be. The best way to do that is by examining where your money currently goes. Compile your expenses from the past few months (print out your debit and credit card bills, look at your bank statements, etc.) and write them all down. Then you can see how much you absolutely need to support your basic needs — loan bills, groceries, rent, and so forth — and what you could cut if you had to. You can also try using a free budget template (Mint has one, and I like this spreadsheet from Girls Night In, too) to make sure you aren’t forgetting anything.

From there, calculate a bare-bones monthly budget that you could survive on if things got tight. Multiply that by three, and you’ve got the minimum amount for your emergency fund. This is your starting goal. Eventually, you’ll want to save more, enough to live on for three to six months if you have to. But for now, focus on the lower end of that number. If you want more advice on determining your emergency fund amount, here’s a very detailed guide.

Next, if you do manage to transfer your debt onto a zero-interest card and are confident in your ability to pay your whole balance in the time window you’ve got, you can pay it off and start saving at the same time. (If you didn’t, and are still paying a high interest rate on your credit-card debt, then hold off on saving until you get rid of that debt entirely.) Either way, once that debt is gone, you can simply take the same amount of money that you were putting towards your credit card every month and start putting toward your emergency fund instead.

Now for the tricky part: How do you actually follow through with this plan? Some people might be disciplined enough to manually set aside “leftover” money at the end of every month, but I am not one of them (what leftover money?). Instead, I take my own decision-making out of the equation and get the internet to save my money for me. Which is to say, I automate the entire process. I saved up my emergency fund a few years ago using the app Digit, which I strongly recommend — it uses an algorithm to pull small amounts of money out of your bank account every few days, so you don’t notice it’s gone. You can set the algorithm to be more or less aggressive, and also transfer extra chunks of money into your Digit account when you’re feeling flush. When I was saving up my emergency fund, I transferred the contents of my Digit account into a high-interest savings account every few months; the whole process took me about a year.

If you don’t want to use Digit, which is understandable (the app costs $5 a month), then you can automate savings within your own bank accounts, too. Most banks have a feature that allows you to set up recurring transfers from your checking account to a savings account; if you time it to happen as soon as your paycheck hits, then you won’t give yourself the opportunity to hem and haw about all the other ways you’d prefer to spend that money. You can also experiment with how much to put away; start out with a monthly or weekly amount that seems manageable, and if you don’t even miss it, try bumping it up a notch.

Don’t worry if it takes you a while to hit your emergency-fund goal. Saving up three- to six-months’ worth of expenses could take years, and that’s fine — just keep plugging at it. You also shouldn’t worry about doing it while you still have student debt, as long as you’re still making your monthly minimum payments. Think of your emergency fund as a security deposit toward your financial health; if something goes wrong (say, you lose your job), you won’t have to default on your loans or resort to your credit card. And the process of saving it up will also teach you how to budget for other, more exciting goals in the future.

How Do I Save Up an Emergency Fund?