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The purpose of an emergency fund is quite specific and narrow: the coverage of expenses like a job loss, a bill, or an emergency repair.
The purpose of an emergency fund is quite specific and narrow: the coverage of expenses like a job loss, a bill, or an emergency repair. Such a fund is supposed to cover only actual emergencies and is not to be used for vacations or any other kind of expenses. It is essential to understand this difference since the fund that gets spent quietly and gradually for some other purposes loses its purpose the moment you need it badly. Thinking of such a fund as insurance rather than savings that you simply do not spend helps to preserve it for its proper purpose.
The advice is usually to build an emergency fund in two stages: a small starter fund, usually equal to one month of the expenses, and a full fund later covering three to six months of the expenses when other priorities are taken care of. The exact amount depends on the stability of your income and the number of people you support: a single income to support a whole family requires a bigger cushion. Starting from the smaller number makes you less scared of it.
Real emergency means something unexpected and urgent that needs to be covered immediately. Something that happened unexpectedly but was foreseeable earlier, an annual expense or something like that, is not a real emergency: it is just a gap in your planning that is supposed to be solved with another tool, such as a sinking fund, that is created in advance. Being sincere about whether the situation is an emergency or not makes you keep the fund for emergencies only.
Such money needs to be accessible within one or two days. However, it should not be kept in your regular checking account, as it is too easy to spend them there without any thinking. Creating a separate savings account with a higher interest rate helps to get profit while keeping it accessible whenever you need it. Any locking the money or keeping them in the place where they can disappear abruptly is worse than a lower interest rate.
Automating a small but constant transfer after receiving your payment tends to work better than relying on willpower and using whatever you happen to have at the end of the month. Such a small amount that is transferred automatically is more likely to be kept untouched. Windfalls, such as tax refund, bonuses, gifts can be an effective way to make quick progress in creating a fund without using your regular budget. Cutting one or two categories for a couple of months is easier to do than restructuring the whole budget.
Saving some money in addition to repaying debts may seem like choosing a side between two good choices. However, a small buffer in addition to the process of repayment may help to prevent a real emergency from making you take out more debt on top of everything else. Once the small fund is created, it is better to shift most extra funds to repay a debt and to save a little bit on the fund. This is not about making you choose between these two goals for the rest of your life.
An emergency fund that has never been used to cover an emergency situation is an emergency fund that has not done its job. It is natural to be reluctant to use it once it has accumulated some money. But the point of having the emergency fund is having the opportunity that you can use it when you need it. Using the fund properly and then rebuilding it is the fund doing its job.
Rebuilding the fund like a monthly bill that gets automated helps to rebuild the fund faster than the intention to "save a bit" when your finances become better. Prioritizing rebuilding the fund over other financial activities like making extra payments for your debts or investing helps to avoid having an emergency expense without a buffer. Reaching your original balance is more important in the short term than starting all other financial goals.
Building a full fund of three or six months in addition to having no debt requires a little less urgency, so it can be done gradually and without rushing. The small buffer is already protecting you from the immediate risks. Building the fund gradually in stages according to your actual needs makes it work better than striving to reach your goal all at once.