Having a budget is important, but what happens when unbudgeted (unexpected) expenses occur? Enter the emergency fund.   

Life is full of surprises. As much as we try to plan out our lives, there is always something lurking around the corner that we don’t foresee. This could be a job loss or pay cut, home or car repairs, medical bills, and the list goes on. Emergency funds exist for this very purpose: to cushion the blow of life’s surprises.  

Unfortunately, many don’t have an emergency fund. According to recent research from Empower,⁴ nearly 2 in 5 Americans (37%) say they couldn’t afford an emergency expense over $400, and over 1 in 5 (21%) have no emergency savings. The consequences of this can be severe as many turn to taking on debt to service these emergencies or stop savings entirely. According to LendingTree, Americans turn to credit cards 58% of the time,⁵ which can dramatically increase the overall cost of the emergency over time.  

To help build an emergency fund and avoid these consequences, Fidelity suggests a couple of things: 

1. Save up 3-6 months of essential living expenses: as a general rule, saving 3-6 months of essential living expenses (see above) can provide a sufficient cushion to soften these surprises. For instance, if your essential living expenses add up to $5,000 per month, then $15,000 would be an appropriate amount on the low end.  
   
   Where on the spectrum do you fall? It depends on several factors such as job security, industry, and how many streams of income you have. One with several streams of income may be able to afford a smaller emergency fund compared to a single source of income. Alternatively, someone in a very cyclical industry like technology, or a seasonal employee, may need to rely on a higher cash outlay. 
   
   In any case, building up an adequate savings amount is paramount. If you are not there yet, it’s ok to start small – say $500 or $1,000. But overtime, you should make it a goal to build this up. Fidelity suggests incorporating emergency savings into your regular budget.  

2. Have a separate account: unfortunately, what happens too often is that individuals, whether they try to or not, dip into their emergency funds for non-emergency related expenses. This leads to insufficient emergency savings and inhibits one’s ability to build up the account. 
   
   To help avoid this, Fidelity suggests maintaining a separate account other than your checking to keep as your emergency fund. This will help set a boundary and encourage saving.  

3. Automate, automate, automate! Setting up automation will encourage good behavior and force you to continue to build up your emergency savings. Just like when you set up retirement plan contributions or automate bill payments, you can set it and forget it. 
   
   This should help alleviate stress that comes with building up your emergency savings so you can save with confidence.  

Budgeting and building an emergency fund may seem like daunting tasks, but they are the foundation of financial freedom and peace of mind. By taking small, intentional steps—like allocating your income with a plan, setting aside funds for the unexpected, and automating savings—you can gain control over your finances and reduce stress. Remember, budgeting isn’t about restriction; it’s about creating opportunities to live the life you want while being prepared for life’s surprises. Start today, and you’ll be taking a powerful step toward achieving your financial goals and building a future you can feel confident about.