Piggy bank with money all around it

Everything You Need to Know About a Fully Funded Emergency Fund

You’ve stashed $1,000 away. You’ve paid off your debt. (Seriously? Bravo! That’s incredible.) Now what?

You’re ready to start your fully funded emergency fund (aka Baby Step 3). This is the unglamorous, but necessary, super-money-saving stage. Why isn’t it glamorous? There’s no paid in full stamp along the path and no debt-free scream at the end of your goal. But what it lacks in charisma it makes up for in confidence.

Your grandmother taught you to save for a rainy day because guess what? It rains. Once your $1,000 starter emergency fund is in place, you’re in a better situation to handle a financial rainy day, but you aren’t secure against a downpour or, God forbid, a flood.

That’s why Baby Step 3 exists: You’re out of debt now, and you don’t need a downpour to push you back under.  

But who, what, when, where, how, and why? Don’t worry—we’ve got those answers!

Who Needs an Emergency Fund?

You do!

Specifically, though, you should wait to save a fully funded emergency fund until you have completed Baby Step 1 (saved $1,000 for a starter fund) and Baby Step 2 (paid off all your debts). Once you’re OUT of debt, you’ve reached one level of financially security: You’ve stopped relying on others to pay for your life. But the fully funded emergency fund launches you to the next level. Now you won’t be tempted to jump into debt again, because you’ll have the stability to care for yourself and your family with your money.

Animation of money stacking then falling over

What Is a Fully Funded Emergency Fund?

I’m glad you asked! Look at your budget. How much does it take for your household to keep running each month? If your income went away, what essential bills and obligations still have to be met? You want to save enough to cover three to six months of expenses in case of an emergency.

How do you decide if you need the three or the six months? We recommend that two-income households save three months of expenses, while single-income households save six months of expenses. There are some exceptions, but this is the initial idea.

That answer probably sparks even more questions. Questions like:

  • What’s the difference between income and expenses?
  • What’s an emergency?
  • What’s an essential bill and obligation?

Let get some answers.

  1. Your income is the money you bring in; your expenses are the things you pay for—the money that goes out. You don’t have to save up months of income, but rather months of essential expenses, which could be less than what you currently take home each month.
  2. What’s an emergency? We’ll talk about day-to-day emergencies in a moment. But we want to point out that the goal of saving three to six months of expenses is founded on the BIG emergency of losing your job. You’d have this fund in place to keep the bills paid as you search for new employment, which brings us to the next question.
  3. If you did lose your job, what are the essential bills and obligations you still have to pay? Universally, we all need what Dave Ramsey calls the four walls: food, shelter (utilities included), basic clothing and transportation. Uniquely, you’ll have to look at your individual budget and ask yourself some serious questions about what is essential and what is nonessential. For example:
    • Family vacation: Will my family be homeless, hungry, naked or stranded without this? No? Okay—then saving for or going on a family vacation can wait.
    • New clothes: Did the kids outgrow all their clothing? Then you should get them something that fits. (Try buying secondhand, by the way.) Or is this expense just because? Then don’t buy the fedora. You don’t need the fedora. Put down the fedora.
    • Vegan jerky-of-the-month subscription service: For all your subscriptions or memberships, you need to question the cancelation fee. If you have to pay the full year in order to drop it, don’t do it. But if there’s no fee for canceling the subscription, then drop it like a bad habit on New Year’s Day.
    • Restaurants: Can you still eat without eating out? Yes! Drive past the drive-through and make something at home.
    • A space-dino-themed birthday party at the indoor laser-inflatable-trampoline park: Can you make a big deal of a birthday without spending a big deal? You can! Boxed cake mixes are not expensive, and kids make their own fun. Have some friends over, but don’t go overboard when there isn’t extra money to spend.

You get the idea. Pay your rent. Skip the restaurant. Buy groceries. Skip the fedora. If you lose your job, don’t use up your emergency fund on the nonessentials. Keep life going while you keep looking for work.

How Do I Get Started?

Before you can start saving, you have to start budgeting. A budget is a money-tracking tool: the plan for what money’s coming in (income) and where it’s going to go each month (expenses). Before you move forward, make sure you have a solid, realistic, livable budget in place. 

Secondly, you have to just say no to new debt. You’re debt-free so stay debt-free. It’s not a moment—it’s a lifestyle.

How Do I Stay Motivated?

While you’re saving over months and even years, your excitement can go right out the window. But don’t let it! You’ve got this. And you aren’t alone. We want to share some quotes from EveryDollar users who are in the middle of this same lengthy, yet rewarding Baby Step. When they need some motivation, these folks think about what lies ahead! Here are some of the goals they want to accomplish once their fully funded emergency fund is in place:

  • “Buying a new car! We've been a one-car family for over a year now. It's been just fine, but we're outgrowing our small sedan.” — Andie
  • “Buying our first house!!!!!!” — Kelly P.
  • “Restarting investments.” — Tim L.
  • “A doggone VACATION. A long one.” — Brenda H.
  • “Feels like it's taking forever. The thought of paying off my house before my son hits high school is our mission.” — Allison P.

And don’t forget the main Baby Step 3 mission: 

  • “Having the ‘cushion’ in case something goes wrong, and then when it does, having the funds to pay for it IN CASH!!” – Darren
  • “Peace of mind . . . that’s what a fully [funded] 911 fund does for you!!” – MB G.

When Will I Have My Emergency Fund in Place?

The complete answer to this question isn’t one we can straight up give. You have to do some math. (Sorry—but thank goodness for that calculator app, right?) We have a sample here to show you how to break it all down.

Joe and Jill have a total of $4,500 in necessary expenses each month. Because they’re a two-income family, we suggest they save up three months of expenses:

$4,500 x 3 (Why did we make this math hard and not just pick $5,000 as the example?) = $13,500.

Their fully funded emergency fund goal is $13,500.

So . . . saving up $1,000 for your starter emergency fund took some work—but a fully funded emergency fund requires even more work. How do you eat a $13,500 elephant? One bite at a time. Gulp.

Now what? Just to give an idea of how long this process could take, let’s move forward with some backward math.

If Joe and Jill wanted to have a full fund in only one year, they need to figure out how much to save each month. Their math would look like this:

$13,500 / 12 months = $1,125

Maybe Joe and Jill have been putting that much toward their goal of being debt-free, so now they have an extra $1,125 each month to aim at their emergency fund. If so, they can definitely save three months of expenses in only one year.

But for some, finding an extra $1,125 to save might not be a doable goal. The rest of us need to get out our budgets and get honest. What extra is there each month? (We’ll talk more about finding that cash in a minute.)

Let’s say Joe and Jill get honest and find $500 a month they can dedicate to saving. The math will go like this:

$13,500 / $500 a month = 27 months

To some of you, 27 months (after years of hard work becoming debt-free) doesn’t seem like that long. To others, it seems like an eternity. No matter what, saving $500 a month for 27 months is nothing to look down on. It’s work. We won’t deny that.

When Do I Use My Emergency Fund? (aka What Qualifies as an Emergency?)

If you’re wondering what qualifies as an emergency, use this quick checklist.

1. Is it unexpected?

December 25 comes the same time every year. You know it. Stores start stocking their shelves with multi-shaped Santas, career-themed nutcrackers, and hand-painted poinsettia ornaments as early as mid-July these days, so you can’t forget it. If you procrastinate purchasing presents, it’s not a reason to dip into this fund—because Christmas is expected. However, losing a job, incurring damage to your home in a storm, or paying for emergency medical expenses are a different story.

2. Is it necessary?

Believe it or not, the line between needs and wants is super easy to blur. You need transportation. You want a new Jeep Wrangler. You need food. You want to run out with friends for lunch rather than eat your lackluster tuna sandwich. You need shelter. You want a luxury apartment with clubhouse, pool and dog park (complete with poo-scooping services). We aren’t saying you’ll never earn your wants—but these aren’t an excuse to use your emergency fund. If your car breaks down, you have to fix it— but you don’t need to empty your emergency account to fulfill your childhood vehicle fantasies.

3. Is it urgent?

Timing is the essence of comedy, dating and emergency funds. Let’s say you find out you landed your dream job. In another state. Moving wasn’t on your radar, but now it’s happening. If the career change is what’s best for you and everyone involved, then the move—and all the expenses—are urgent! (But make sure to negotiate a moving stipend with your new employer first!)

If you do end up having to use your emergency fund, what’s next? You build it right back up again! It stinks—to say the least—to get ahead only to fall back behind. But this emergency fund is here for security, and it’s better to deplete it and have to fill it back up again than to go into debt.

Where Do I Put the Money?

This money needs to be “liquid,” meaning it needs to be available. This isn’t a long-term investment; it’s insurance. You pay money for insurance, so it’ll be there when you need it. A fully funded emergency fund is the same. You put money in—and it’s there when you need!

So it needs to be available, but that doesn’t mean it’s in a box buried in your backyard or hidden under your mattress. In fact, it doesn’t mean it sits around all day with your regular money in your regular checking account either. That’s too available.

We recommend keeping your emergency fund in a simple money market account with a good mutual fund company. You can get to it by writing a check or going to an ATM, but it won’t mingle with your regular wages and end up being a temptation when your favorite designer launches a new line at Target or your team makes the play-offs. While those things are awesome, they aren’t emergencies.

How Do I Save Up a Fully Funded Emergency Fund?

This! This is what you’ve been waiting for, right? The practical side. You know you’ve got to take one bite at a time, but how? How do you find the money in your budget, and how do you get extra money to make this goal a reality?

1. Reposition

All that money you were using to snowball your debt—roll that right into making your emergency fund goal happen. You’re already used to that money being nonexistent, so it’s a good time to keep ignoring it, from a spending perspective.

2. Reduce

You probably already found places to tighten your spending belt, like cutting out fancy coffees or doing without a new wardrobe each season. But maybe your debt-paying was a little loose, or you got a little spendy along the way. It happens to us all. Now’s the time to find those add-ins, subtract them from your spending, and add them to your fund.

3. Reach

You’ve heard us talk about a side hustle. We aren’t above delivering pizzas as a part-time job to meet money goals. In fact, we admire and applaud it! Before you grab an extra job, really think about your skill set. Teachers, could you tutor after school? Graphic designers, could you find some side projects? Or maybe you have a genuine talent you don’t use in your career that could bring in extra money on the side. Your talents could get you closer to your fully funded emergency fund!

4. Remove

Sell stuff. Really. You have things you don’t need lying around that other people would pay good money to own! Try craigslist; Facebook Buy, Sell, Trade; Poshmark; and thredUP. You don’t need a card table, circular price stickers, and a Saturday in the sun to sell your used stuff anymore. The internet is full of ways to make extra money while you declutter your life.

What Happens When My Emergency Fund Is Complete?

First of all—have a party, take a trip, dance like nobody’s watching! Seriously. Celebrate. This is beyond exciting. If we could throw confetti at you through your screen, we would.

Now it’s time to get your eyes on the next prize—retirement! EveryDollar recommends contributing 15% of your household income to retirement, but you can raise this amount if you’re getting closer to your golden years.

Now What?

Yoga, chamomile tea, and lavender-scented everything are all great. But if you really want to reduce your stress, you should increase your financial stability. When you have a fully funded emergency fund, you can rest well at night knowing you can stand up against a financial threat without being beaten. You aren’t living paycheck to paycheck; you’re living with confidence.

You’ve already proven your ability and endurance by setting up and living on your budget. You’ve torn down the debt that once owned you. This fully funded emergency fund is the next step in telling your money you are in control. You’re the owner, and you tell your money where to go.

Get started by setting up an emergency fund in your EveryDollar budget. Get a front-row seat to watching your fund grow as you add to it each month—it’s yet another way to stay motivated through Baby Step 3.  

Set up your emergency fund in a free EveryDollar budget today!