Here’s How To Build a 12-Month Emergency Fund

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To be financially resilient, you need a source of emergency funding for the unexpected, such as a job loss, major repair, uncovered medical bills or even a global pandemic. According to a survey conducted by YouGov for Forbes Advisor, nearly 40% of people who had emergency savings prior to March 2020 accessed it, and over 73% of those people spent more than half of their emergency funds.

Now, 47% of those who did not have an emergency fund to draw from during the pandemic are planning to build their savings. When asked how much they think is a practical amount to save for emergencies, most respondents chose four to six months of expenses.

But why not build a more heavily cushioned emergency fund — one that could sustain you for an entire year? Here’s why you might need a 12-month emergency fund, and the steps you can take to build it. 

Why a 12-Month Emergency Fund Is a Good Idea

“A 12-month emergency fund may be necessary if you are a single breadwinner and you are in a highly economically sensitive job,” said Alex Caswell, wealth planner at RHS Financial. “In this case, it may take you a much longer time to bounce back to your regular income. Another alternative is if you are retired. You may feel more comfortable with a 12-month emergency fund because it allows more time for the markets to recover and your portfolio to provide a sustainable distribution percentage.”

Make Your Money Work for You

Dann Ryan, CFP, managing partner at Sincerus Advisory, said that people who might require a larger financial cushion are those who have irregular or unstable income, such as the self-employed, or people who have very large fixed expenses that cannot be reduced.

Steps To Building Your Fund

Whatever your reason for wanting to save a year’s worth of emergency funding, here’s how to get there. 

Determine Your Monthly Expenses

“The first step is to figure out how much you spend each month on essential expenses like housing, food, transportation, and insurance,” said Samantha Hawrylack, personal finance expert and co-founder of How To FIRE. “This will give you an idea of how much you need to save each month to cover your basic needs.”

Then, multiply that amount by 12 to get the amount of money you need to save for a 12-month emergency fund.

Calculate Your Monthly Income

“Next, calculate your monthly income after taxes,” said Hawrylack. “This will give you an idea of how much money you have available to save each month.”

Saving for a 12-month emergency fund isn’t something that will happen overnight. For example, if you have $3,000 worth of expenses every month, you’ll need to save $36,000. And even if you are able to save $1,000 per month, it will still take you three years to reach your goal. Be prepared to make some adjustments and sacrifices to get to your goal faster.

Make Your Money Work for You

Open a Money Market Account

“Invest in a money market account rather than a high-yield savings account,” recommended John Li, co-founder and CTO of Fig Loans. “Many money market accounts come with better interest rates, meaning your emergency fund will earn more for you, so you don’t have to save as aggressively to reach your goals quickly. Twelve months of expenses is a significant chunk of money, and that money should work for you as much as it can without investing in risky assets.

Li added, “Research the account fees before you sign up, as some can significantly take away from your returns. Other accounts require a minimum balance for the best rates, so choose the provider with the features that suit you best.”

Set Up Automated Transfers

“Set up a recurring automated transfer from the account where your paychecks get deposited to another savings account,” said Ryan. “Create some artificial friction, maybe by putting it at another bank. The dollar amount of the transfer should be high enough to make you slightly uncomfortable. You can always adjust it down later if absolutely necessary, but you almost certainly won’t increase it.”

Cut Back on Unnecessary Expenses

“Take a close look at your spending and see where you can cut back, even by a little bit, so you can save more each month,” said Andrew Bryant, financial expert and founder of Credit Weld.

You can also find ways to save on necessary expenses, like insurance, groceries and child care. 

Make Your Money Work for You

Sell Unused Belongings

“If you have any extra belongings or items you don’t use, sell them online or at a garage sale to help increase your savings balance,” recommended Bryant. Another way to score some extra cash to put toward your 12-month emergency savings goal is to sell your items on Facebook Marketplace.  

Get a Part-Time Job

“If you need to boost your savings balance quickly, consider getting a part-time job in addition to your full-time job,” Bryant said. “You can use the extra income to help reach your savings goal faster.” 

If a part-time job with set hours isn’t for you, you can also consider one of these 22 high-paying side gigs

Use Windfalls Wisely

“If you receive any money from gifts, bonuses or tax refunds, put it towards your emergency fund so you can reach your goal even faster,” Bryant recommended.

Stay on Track With Other Financial Goals

“A final thought, make sure you are not sacrificing your other goals, like saving for retirement or paying down debt, to build an emergency savings account,” said Kyle Harpin, CFA(r), CFP(r) and investment analyst at Edward Jones. “The key is to work toward these goals in tandem.”

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