Step 1: Set up your emergency fund
An emergency fund is money kept aside, in cash, only for real surprises: losing your job, a broken boiler, a medical bill. It comes first in the plan because it protects every other step: without it, the first surprise goes on a credit card or forces you to sell investments at the worst moment.
Why a company keeps cash — and why you should too
In the balance sheet lesson we called cash "a cushion for hard times". Companies with no cash and a bad year must borrow at high rates or sell assets cheaply. A household is no different: the emergency fund is the cash line on your personal balance sheet.
1. Open a separate account today
Don't wait until you have a full budget — opening the account takes ten minutes and is the first action of the whole plan.
- Separate from your everyday account. Money you can see on your debit card gets spent. A different account (ideally named "Emergency") adds a small, useful barrier.
- Safe. A savings account or short-term deposit at a regulated bank. Deposits are protected by government guarantee schemes up to a limit — for example $250,000 per bank per depositor through the FDIC in the US, and €100,000 per bank per depositor in the European Union.
- Quick to reach. You should get the money within a few days without penalties. Avoid long fixed-term deposits that lock it up.
- Earning some interest. Compare savings rates — online banks often pay more. But safety and access beat the last 0.5%.
2. Start with a starter fund
Sam has no savings yet. Building months of expenses takes time, so the plan starts small: a starter fund of about $1,000 (or one month of essential costs, whichever is smaller). That covers most car repairs, a new laptop or a dentist bill — the surprises that usually end up on a credit card.
For a first estimate, Sam opens last month's bank statement and adds up only the bills that must be paid: rent, utilities, groceries, transport, insurance, phone and minimum loan payments. Total: about $1,850 a month. (Step 2 checks this number properly.)
3. Set the full target
| Your situation | Suggested fund |
|---|---|
| Stable job, two incomes in the household, no children | 3 months of needs |
| Stable job, single income or dependants | 4–6 months |
| Freelance, commission, seasonal or self-employed | 6–12 months |
| Close to retirement, or a home owner with an older house | 6 months or more |
4. Fill it automatically
Set up a standing order: on payday, a fixed amount moves from your current account to the emergency account. Sam starts with the whole $580 until the $1,000 starter fund is reached, then — after expensive debt is cleared in step 4 — goes back to filling it to $5,550. The savings goal calculator shows how long any target takes.
5. Rules for using it
✅ Emergencies
Job loss, urgent medical or dental care, essential car or home repairs, an unplanned trip for a family emergency.
❌ Not emergencies
Holidays, sales, a new phone, Christmas (it happens every year — budget for it!), or "a great investment opportunity".
If you use it, that's what it's for — no guilt. Then make refilling it the top priority in your budget until it's back to target.
Show the answer
With irregular income, aim for at least 6 months: 6 × 2,000 = $12,000. At $500 a month that's 24 months — two years. That's normal! She should reach the $1,000 starter fund in 2 months, then keep going. Any unusually good month (a big project) can top it up faster.