(Image credit: Getty Images)Americans are facing higher costs today in almost every area of life — health insurance, groceries, housing and more. So it’s understandable that Bankrate’s 2024 Annual Savings Report shows 27% of U.S. adults have no emergency savings at all — and a further 29% don’t have enough saved to cover three months of expenses.Whether you’re building an emergency fund from scratch or trying to add to a small sum you’ve already managed to save, it can be hard going. We’re going to take a look at why your emergency fund matters … and how to use the 1-3-6 framework to build yours.Why build an emergency fund?An emergency fund is an easy-to-access cash reserve that should be used only for urgent unexpected costs. This might include out-of-pocket medical expenses, car or appliance repairs, funeral expenses or salary replacement if you’re laid off from your job.Subscribe to Kiplinger’s Personal FinanceBe a smarter, better informed investor.
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Sign up for Kiplinger’s Free E-NewslettersProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.Profit and prosper with the best of expert advice – straight to your e-mail.Your emergency fund lets you handle these expenses without being forced to turn to racking up high-interest debt. It also gives you peace of mind: Bankrate found that “not having enough emergency savings” is a source of financial stress for 59% of Americans.Having that money in the bank also lets you:Build wealth, as you won’t need to turn to other sources for urgent cash. For example, if you don’t have an emergency fund, you might end up taking a “hardship withdrawal” from your 401(k).Get closer to a big goal, whether that’s financial independence, early retirement or taking a career sabbatical.Keep life running smoothly so you can afford to replace your washer if it breaks or get your car repaired quickly.You need an emergency fund even if you have insurance. As Curran Clark, a co-founder at ContractorNerd, explains, “Most insurance policies include a deductible — and this can be surprisingly high. The average deductible for employer-sponsored health plans in the U.S. was $1,735 in 2023. Without an emergency fund, one unexpected medical event could plunge you deep into credit card debt or push you into taking out a high-interest loan.”Why use the 1-3-6 method for building your emergency fund?The 1-3-6 method is a practical, realistic way to build your emergency fund — even if you don’t have much money to spare each month.With this method, your end goal is to have six months of expenses covered (according to Bankrate, 63% of Americans say this is the minimum they’d need to feel comfortable). But each separate milestone is a real achievement, so you can focus on building your emergency fund in a steady, sustainable way.One month of living expensesYour first goal in the 1-3-6 emergency fun
