A bike tyre bursts. A phone screen cracks. A dentist bill arrives. Surprises like these happen to everyone. The question is whether they turn into stress and debt, or just into a small bump. In this lesson of Mondosol’s Make Money course, Kofi explains how an emergency fund works and how to start one, even with very little money.
Read the article, watch the videos, or press play and listen.
In this article
What an emergency fund is
An emergency fund is money you set aside only for unexpected, necessary costs. It is not for holidays, new clothes or a sale. Think of it as a safety net under your budget.
Good reasons to use it:
- An urgent repair you need for school or work, like a bike or a laptop.
- A medical or dental bill.
- A sudden drop in income, for example losing a part-time job.
Without a safety net, people often use a credit card or a loan for these costs. Then the surprise keeps costing money in interest, long after it is over.
How much should you save?
A common guideline for adults is three to six months of essential expenses. Essential means the costs you cannot skip: housing, food, transport, bills and insurance.
That can sound like a lot, so build it in steps:
- Starter goal: a small amount that covers a typical surprise, like a repair.
- One month of essential expenses.
- Three months of essential expenses.
- Six months, if your income is irregular or you support others.
If you are a student living at home, your starter goal may be all you need for now. The habit matters more than the size.
Where to keep it
Your emergency fund should be safe and easy to reach, but not so easy that you spend it by accident.
- A separate savings account at a bank is a good choice. Give it a name like “Safety net”.
- Not in your everyday account, where it mixes with spending money.
- Not in shares or other investments, because their value can fall just when you need the money.
In many countries, bank deposits are protected up to a limit by a deposit guarantee scheme. You can read more in our lesson on banks and accounts.
How to start on a small budget
- Pay yourself first. Move a fixed amount to savings on the day money comes in, before you spend.
- Automate it. A standing transfer means you don’t have to remember.
- Use extra money. Birthday money, a tax refund or a summer job can give the fund a big boost.
- Refill after you use it. Using the fund is fine. That’s what it’s for. Then start topping it up again.
A worked example
Invented numbers: Lina is 19, works part-time and has essential costs of about 12,000 kr a month.
| Goal | Amount | Time at 1,000 kr a month |
|---|---|---|
| Starter goal | 5,000 kr | 5 months |
| One month of essentials | 12,000 kr | 12 months |
| Three months of essentials | 36,000 kr | 36 months |
Three years sounds long. But after only five months, Lina can handle a broken phone without borrowing. And if she adds part of a summer job to the fund, she gets there much faster.
Watch: emergency funds explained
Video: “Emergency Funds – How Much to Save and How to Build One” by RBC, on YouTube.
Video: “Why You Need an Emergency Fund” by Experian, on YouTube.
Try it: Kofi’s starter plan
- Add up your essential costs for one month.
- Choose a starter goal you could reach in 3 to 6 months.
- Decide on a weekly or monthly amount and set up an automatic transfer.
- Give the savings account a name that reminds you what it is for.
- Write down three things that count as emergencies for you, and three that don’t.
FAQ
What is an emergency fund?
Money saved only for unexpected, necessary costs, like urgent repairs, medical bills or a sudden loss of income.
How much should be in an emergency fund?
A common guideline is three to six months of essential expenses. Start with a small starter goal and build up step by step.
Should I save or pay off debt first?
Many people build a small starter fund first, so a surprise does not create new debt, and then focus on paying off expensive debt. Your situation may differ, so talk to a trusted adult or an adviser if you are unsure.
Is it okay to use my emergency fund?
Yes, that is what it is for. Use it for real emergencies, then refill it.
Keep learning
- Practise it: open the interactive Make Money lessons in your learning journey.
- Previous lesson: Tracking your spending.
- Next lesson: Avoiding debt traps.
- Related: The Power of Saving and compound interest.
This article is educational and is not financial advice. Kofi is a character from Mondosol’s story cast. Example numbers are made up to show how the idea works.
