Foundations of a Strong Budget: Part 6 – Emergency Savings
In Part 5, we looked at why saving is so important, how much to aim for, and how to start building the habit. Now let’s take the next step and talk about the types of savings. Remember, not all savings serve the same purpose. Setting aside money for the right reasons helps us prepare for both the expected and the unexpected.
Over the next few posts, we’ll break savings into three major categories. Today, we’ll start with the most urgent and essential: emergency savings.
Why Emergency Savings Matter
An emergency fund is your financial cushion - the safety net that helps you stay afloat when life throws you a curveball.
- What would happen if you lost your job?
- Could you cover rent or a mortgage payment?
- Would you be able to buy groceries, keep the lights on, and make your car payment?
Without emergency savings, many of us would need to rely on credit cards or loans, which can quickly snowball into long-term debt that can take years to get out from under. With emergency savings, you have the ability to handle life’s surprises without panic.
Start Small - It Adds Up
If you don’t have an emergency fund yet, don’t get discouraged. The important thing is to start now, even if it’s small.
Saving $25 a week adds up to $1,300 in a year. Even saving $5 or $10 a week builds momentum.
That $1,300 could cover a mortgage payment, multiple car payments, utility bills, or a major car repair. It may not seem like a fortune, but it makes a huge difference when an emergency happens.
Most importantly, it gets you into the habit of saving. Over time, that $25 can become $50 or $100. One year of effort can grow into years of financial stability.
How Much Is Enough?
The ideal emergency fund is 6–12 months of expenses. That amount gives you real peace of mind, but it’s a big goal and it can feel overwhelming. Don’t let that stop you. Build it step by step:
- Save enough to cover one car or mortgage payment.
- Work up to one month of expenses.
- Aim for three months.
- Keep going until you reach six months or more.
This step-by-step approach makes the goal manageable, while still protecting you against unexpected events.
Savings vs. Debt
Some people hesitate to build an emergency fund because savings accounts often earn modest interest. But here’s the reality:
- Saving $1,300 in an account might only earn a few dollars in interest.
- Putting $1,300 on a credit card at 30% interest could cost you nearly $400 in one year, and much more if left unpaid.
Emergency savings may not make you rich, but it saves you from expensive debt. That alone makes it one of the smartest financial moves you can make.
What’s Next
Emergency savings are the foundation. Once you have a cushion, you can shift focus toward other types of savings that help manage life’s regular expenses and prepare for long-term goals. Next, we’ll look at periodic or “set-aside” savings and long-term savings. Together, these will round out your strategy and make your budget even stronger.