How I’m Creating an Emergency Fund with One Year of Income

One of my major goals in life is financial freedom. For me, this doesn’t mean having a lot of money. Financial freedom simply means I’m secure enough financially that I don’t need to worry about having money.

Setting up an emergency fund with at least one year of income is a big part of this. I haven’t reached it yet, but thanks to some great resources on the topic, I’ve got a strategy in place that should help me reach this goal in 3-4 years.

Why One Year of Income in Savings?

It’s important to have extra savings to cover unexpected events. It’s also important to save for retirement. But those aren’t my main objectives in creating one year of income in savings.

My purpose for starting an emergency fund is simple: with it, I can go for one year without earning a dime.

If you’re living paycheck to paycheck, you don’t have significant flexibility in changing your career or business. Even if you wanted to make a switch, you’re completely dependent on your current income streams to support you. With an emergency fund, you have an entire year to transition from one work direction to another.

Why is Having Transition Time Important?

I love running this business. I can easily foresee myself growing it into a healthy full-time income and operating it for decades to come. But without at least an emergency fund in savings, I will rely on it to support me.

Without a reasonable escape route, I’m no longer working on this business because I love to, but because I need it to survive. It may be a luxurious prison, but it is still a prison. Financial freedom means that money shouldn’t be the driving force in my decision-making. An ambitious goal, but it can be one step closer with an entire year in savings.

Even if you have no intention of leaving your current path, an emergency fund can give you greater confidence in what you’re doing. Every business activity or job will eventually create conflicts between your professional mission and your need for income. For myself, this could potentially mean writing articles or recommending products I don’t fully agree with, just because they will earn money. Having an emergency fund gives me the ability to focus on a mission, instead of just profitability.

Financial Freedom Instead of Being Rich

Wealth and financial freedom are completely different things. Although it would be nice to be rich, I have no real desire for extreme material wealth in itself. However, financial freedom is an attractive goal for me.

Being rich means having a lot of money. However, if your costs are close to your income, you’re no more free than someone earning minimum wage. If your income was suddenly removed, you’d have to make huge personal changes or go bankrupt.

Profit is income minus expenses. If you’re spending close to what you earn, you may have a more comfortable lifestyle, but you haven’t gained any freedom. While I would argue that financial freedom is as much a mental goal as it is a material one, it is distinctly different from being wealthy.

Establishing an emergency fund with an entire year of income isn’t about the amount of money. For one lifestyle, that fund could be $250,000. For another it might be $15,000. Freedom isn’t a dollar amount.

How I’m Setting Up an Emergency Fund

My first goal for an emergency fund is $20,000 in savings. Because of my record keeping, I know living on this earth cost me exactly $20,132 in 2008. Not a hefty sum, but I’m also an unmarried student with no liabilities. It’s not as large as I’d eventually like, but it’s a good starting point that fills the basic requirements of covering expenses for a year.

10% Per Month, Every Month

To reach this goal, I’m putting 10% of my monthly income into a separate savings account each month. Ten percent isn’t a huge contribution, at this rate it will take 10+ years to reach one year’s worth of income. But as my income grows, I’ll make efforts to increase the percentage progressively, up to 30% or even higher.

Make sure you take any savings money off the top, instead of from the bottom. If you only save what you have left, often you won’t have very much left to put away. Automatically taking out the money forces you to adjust your spending habits.

I’ve always maintained savings, but I started contributing 10% a few months ago.

Don’t Touch the Money

For the emergency account to be effective, you can’t dive into it for reasons outside your purpose for having it. Saving for weddings, cars, houses or travel is great, but they are separate goals from financial freedom.

I’ll admit, this part of the advice will be difficult for me to follow. My income is still close to my expenses, as I haven’t grown this business to create a healthy gap between revenue and my lifestyle costs. Also, traveling on a foreign exchange will be costly.

Even if you can’t know with certainty that you will never have to dip into your emergency fund, there is still value in building the habits to start one. If you get used to allocating 10% of your income into a separate account, that habit will continue even when you’re earning a good income.

Creating the right habits is half the battle.

Freedom and Security

I think these current economic times have taught us there is no absolute security. Even with an emergency fund, you aren’t completely secure against misfortune. Freedom is a psychological goal. Having financial flexibility to switch businesses or careers without going into poverty helps, but it’s not complete.

Financial freedom means you accept the lack of complete security and prepare the best you can. But you don’t let money rule your life.

  • Enrique S

    I wish that I’d done the same when I was your age. I’m drumming it into my two sons that they should start saving at an early age to enjoy financial freedom. I’m going to have them both read this post. Thanks.

  • David Safar


    Sounds like a good plan, though I do have a bit of a quibble with terminology. You say you’re creating an emergency fund with one year of *income*, though later you noted that your target number is actually based on your *expenses*. IMO that’s a better way to do it, and it’s a valuable distinction. When your expenses are close to your income, this may not seem important, but if you make $1 million per year and only live off of $50,000, you only need to base your emergency fund on the latter figure!

    Along similar lines, I think that if your income is noticeably more than your expenses (and particularly if it’s variable), paying yourself last can actually be more beneficial than paying yourself first, as your “leftovers” may be more than the fixed amount or percentage that you would have saved otherwise. I’ll be writing a post about this soon myself — I think “pay yourself first” is good advice in many, but not all, situations, and its near-gospel status in personal finance circles is undeserved.

    Anyhow, thanks for this post — it sounds like you’re on the right track!


  • Vlad Dolezal

    I realized some time ago that for me, being rich isn’t about having tons of money, but simply having enough cashflow to support my living.

    As you say – financial freedom.

    Based on some rough calculations, €2000 a month should be enough for my living expenses. I also slapped on a random figure that I want to have in savings, but based on your advice, I’ll probably change it to one year’s worth of income.

    Now all I need is to actually get that income and savings. That’s the easy part, right? 🙂

  • Kris

    And one way that you have such small expenses is that you go to school in Canada.

  • Scott Young


    That’s completely true. I have friends in the United States that pay $30,000+ per year for college.

    Also, I live in Winnipeg, which is probably one of the cheapest cities in Canada to live in.


    Ah, you’re completely correct. The purpose of the fund is that you can go without earning income for a year without any noticeable impact on your lifestyle–or going into debt. Focusing on expenses is a better route, agreed.


    Saving isn’t easy. Especially if money is tight. But, even if the period of time you need to reach the goal is long, you can still work towards it.

  • Conn

    Financial freedom is my goal too. But my way to reach this is harder than yours, because I have to start with debt elimination. I hope I’ll get rid of debt this summer. Success!

  • Kris

    Oh, wow, I didn’t realize that sounded so anti-Canadian colleges. I just meant that it’s something to consider when you decide where to go to college, or what your expenses are.

  • Scott Young


    No offense taken. But I go to a public, Canadian university. If you compare my current expenses to someone in a private American university, the living expenses are quite different.


    Good luck!


  • Steve

    That’s definitely a good idea! It will take time, but I have a goal to create even more than that in my emergency savings account. I guess the best place to start is with a series of milestones, one month, then three months, then six months, then nine, then one year, and so on…

  • Loren

    Good Post Scott! About 4 years ago, when my wife and I got our tax refund, we started doing this. Normally, every year we’d get back a lump sum of money and spend it within a few weeks. But, we were living in a city far way from our families and with no one to lean on for help, we decided to just open an account and “leave it alone for a while”. Well, for the very first time, we had money in the bank. After a few weeks it started to sink in.
    We had no more worries if the check would clear in time for the rent or bills. If we wanted to go out to eat, we could. After we moved back home, we started it again, except this time we cut all of our expenses down as low as we could by doing a few things:
    1. Unplugging most of our electric items (cutting the bill down 35%)
    2. Calling our cable/phone/internet/car insurance and negotiating better rates
    3. Paying off our car loan ASAP
    With all of the EXTRA money, we started having that AUTOMATICLY put into a separate savings account that wasn’t too convenient to get to.
    We weren’t really missing the money because it was always going out, but now it as going out to us!
    If you have debt, pay the minimums on ALL but the smallest. If you focus on eliminating the smallest, then the next smallest, soon (year or two) you will have no debt and can do what Scott is doing. It gives you a completely different feeling when you have money in the bank and aren’t stressing over job security, holiday gifts or even vacations. I will never go back to paycheck to paycheck again. Keep up the good work Scott!!

  • Mark Foo |

    Hi Scott,

    You’re so young yet you’re so much more sensible than most people older than you. Creating an emergency fund or simply saving for the rainy days is such a common sense thing yet most people don’t do it. I’m happy for you that you’re starting it at such a young age.

    I may sound cruel but I do think the current crisis the whole world is going thru is good in a way that it forces people to wake up to the real world. Life will never be a constant bed of roses. We always need to be prudent and plan for the future even in good times. I hope people will take a lesson from this crisis and learn to manage their finances better in the future.

    However, creating an emergency fund is just part of the equation. We need to do more than that. We need to create a proper financial management system so that we’re more thoroughly prepared and in control.

    One of the ways I find very effective in controlling my finances is to set up different accounts for different purposes, which, setting aside an emergency fund is of cos’ one of them.

    I’ve written a pretty detailed article on how I do that and if you’re interested to find out more, you can go:

    A Practical System To Managing Your Money

    While you’re there, I hope you enjoy the read.



  • Finanzas Personales

    one good approach is to replace some kind of loan payment with a new savings habit. I used to have a $250 a month loan and ever since I finished paying it, I continued extracting first this amount from my income, but this time to start an accumulation account. A second income can also be of great help in this sense.
    The one thing I find particularly good about your approach is that your objective is clear… in fact, I think it couldn’t be clearer. That, for me, generates all the motivation and drive you need to make it.
    Good luck and congratulations!!!

  • KJ

    Just my opinion but I would argue 1 year of expenses in an emergency funds is overkill. Being as young as you are, the difference in that money earning less than 1% in savings versus 7% historic returns invested in stocks and bonds in a ROTH (where you still have access to the money if you need it) is significant. 6 months of an emergency fund should be plenty and by the time you get to that level you should know if your business can support your lifestyle or not.


  • Scott Young

    Depends on what qualifies as a year’s savings, too I suppose.

    Earnings are important, but liquidity is too. Ultimately an emergency fund’s main benefit is that it reduces your worst case, which is, in my opinion, a more important consideration than the typical mean/std. deviation assessment of risk one finds typically in finance.