Emergency Fund
37% of Americans can’t cover a $400 emergency (Board of Governors of the Federal Reserve System, 2024). They’re one car repair away from debt spiral.
An emergency fund is the foundation. Build it before investing.
The Target
| Situation | Target |
|---|---|
| High-interest debt | $1,000 mini-fund first, then attack debt |
| Stable job | 3 months of expenses |
| Variable income / single earner | 6 months of expenses |
| Self-employed | 6-12 months of expenses |
Expenses = rent + utilities + food + insurance + minimum debt payments. Not income.
Where To Keep It
High-yield savings account. Currently 4-5% APY. Not invested. Not locked. Instantly accessible.
Don’t optimize returns here. This is insurance, not investment. Liquidity matters more than yield.
The Build Order
- $1,000 starter fund : Stops small emergencies from becoming debt
- Pay off high-interest debt : Can’t build wealth while paying 20% interest
- Full emergency fund : 3-6 months expenses
- Then invest : Now you’re ready
When You Use It
Emergency = job loss, medical bill, car repair, essential home repair.
Not emergency = vacation, new phone, “good deal” on something.
After using it: Pause investments, rebuild fund to target, then resume investing.
Objective
Build a liquid cash reserve that covers 3-6 months of essential expenses. The goal is to decouple emergencies from debt. Without this buffer, any unexpected expense triggers credit card debt, which compounds against you.
Cadence
- Monthly: Automate a fixed transfer to high-yield savings until target reached
- After any withdrawal: Pause investments, rebuild to target, then resume
- Annually: Recalculate target based on current expenses
KPIs
| Indicator | Type | Target | How to measure |
|---|---|---|---|
| Monthly savings rate | Leading | Fixed amount until target | Bank auto-transfer |
| Fund balance | Leading | Moving toward target | HYSA balance |
| Months of expenses covered | Lagging | 3-6 months depending on situation | Balance ÷ monthly expenses |
| Emergency debt events | Lagging | Zero | Did you use credit cards for emergencies? |
Failure Modes
| Problem | Fix |
|---|---|
| Dipping into fund for non-emergencies | Separate account; define “emergency” clearly: job loss, medical, car/home repair only |
| Fund earns nothing | Use high-yield savings (4-5% APY); don’t invest it |
| Never starting because target feels huge | Start with $1,000 mini-fund; momentum matters |
| Rebuilding too slowly after withdrawal | Pause all investing until fund is restored |
| Over-saving (hoarding cash beyond target) | Once target reached, redirect surplus to investing |
Related
- Next step: Automate Investing (invest after fund is built)
- Complement: Manage Debt (pay off high-interest debt alongside mini-fund)
- Concept: Cash Flow Principle (budget to fund the fund)
- Concept: Compound Interest (why debt compounds against you)