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Step 2: Save $1,000 in an Emergency Fund

$1,000 emergency fund

Once you have a budget in place, your next step should be to save $1,000 in an emergency fund.

If you're just starting out, you might have nothing in your bank accounts. You might have some credit card debts or other debts. In all cases, it's important to save up $1,000 in an emergency fund before you start worrying about anything else.

How Long Will It Take?

If you've created a budget that allows you to spend less than you earn, you'll know how long it will take you to save up $1,000. If your remaining income each month is $50 it's going to take you 20 months to save up. My recommendation is to save up $1,000 in less than 6 months if possible. If you don't think you can, take a look at your budget again and get creative. If you still can't, it might be time to get a part-time job. Living without an emergency fund is dangerous. Do everything you can think of to make it happen.

Where Should I Keep It?

The main purpose of having an emergency fund is being able to access it when you need it. You also don't want to subject this fund to risk. My recommendation is to simply keep your $1,000 in a savings account. Sure, you'll earn almost zero interest on it, but it will be instantly accessible, and it won't be subject to the risks of the market. You could even keep it under your mattress if it makes you feel better. Just put it somewhere safe.

What Constitutes an Emergency?

"Oh, that TV is on sale today only!" is not an emergency. Your emergency fund should only be used to pay for things that hinder your day-to-day life. Things like a broken washing machine, a flat tire, etc. Christmas presents are not an emergency. You know when Christmas is, every year, so you can plan for it.

What If I Have An Emergency And Have to Use My Emergency Fund?

Not if, but when. When you have an emergency and have to dip into your fund, you must leave the path and go back to Step 2. If you've moved on to Step 3, and you're focusing on paying off debt, you've got to stop temporarily. Any excess income you have each month should be focused on replenishing your emergency fund. Once you're back to $1,000, jump back to where you left off.

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