How Do I Save Up an Emergency Fund?

My Two Cents Jan. 14, 2021  By Charlotte Cowles

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.

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