9 Tips to Build an Emergency Fund on a Budget
“Build an emergency fund!” It’s popular financial advice, but what if you don’t have money to spare after paying your bills or you don’t have a steady income? Fortunately, there are ways to save money on a tight budget.
Even if you do have extra money, you may not know how much you should save, where you should keep this money, or when it’s OK to use it.
To help, here’s how to start an emergency fund on a budget — and why it’s better to begin saving as soon as you can.
1. Start small and save automatically.
What’s the most you could save right now and not feel stressed? Even if it’s just a few dollars a week, you should set up automatic transfers so that money is regularly moved into a savings account. Most banks offer automatic transfers with any basic checking and savings account, but check with your bank to be sure.
Why save automatically instead of doing it yourself? Because you only have to do it once. It doesn’t get much easier than spending five minutes setting up an automatic transfer now so that your savings account grows over time. If you pick just one way to save money on a tight budget, make it this one, and do it right now!
If you’re having trouble choosing how much to save every month, try breaking it into smaller amounts more often. For example, if $150 every month sounds crazy, consider a weekly transfer of $35 or a daily transfer of $5, which will still get you to $150 per month. Do whatever feels the easiest.
2. Write down what you’re saving for and stick to it.
Once you start saving a little, set some guidelines for what you consider a true emergency — and what you don’t. Usually, emergencies are unexpected, immediate, and necessary. Typically, an emergency fund is used for:
Car repairs (especially if you need your car to work)
Living expenses if you can’t work or lose your income
On the flip side, here’s what an emergency fund is not for:
Long-term goals, like retirement or college
Planned purchases, like upgrading your car or TV
Black Friday deals and other limited-time sales
Smoothing out predictable or seasonal dips in your income (this should be a separate savings fund)
Paying quarterly taxes
If you want to save for something that’s expected, far away, or a luxury, these are also worthy goals! Just keep that money in a separate account. Your emergency fund is only for emergencies.
3. Set a long-term goal (with smaller ones along the way).
How much should you keep in your emergency fund? Most experts recommend setting aside three to six months’ worth of living expenses. If that sounds like more than you can afford, start smaller. Once you reach that, aim to double it. You might reach your target savings amount before you even realize it!
Once saving becomes a habit, you can take a closer look at your emergency fund goal and adjust it to your needs. If your spouse or partner has stable income, you have no dependents, and you’re young and healthy, three months of living expenses could feel just right.
But maybe you’re a single parent, have a medical condition that sometimes sends you to the emergency room, or your main source of income is unstable. If that’s you, consider aiming to save or a few extra months of regular expenses.
4. Keep your fund close (but not too close).
Emergencies are unexpected, so you’ll want to have quick, easy access to your money. That means you shouldn’t use it to invest in the stock market, real estate, or anything else. Just keep it in a special account so you can get to it when you really need it. But make sure it’s not too easy to get, though, or you might spend it on non-emergencies.
Consider opening an account at a different bank, and don’t get a debit card or checkbook for this account. Instead, have a plan for transferring the cash to your checking account at your main bank if you need it. Funds might take a day or two to hit your account. This is a lot faster than selling off investments, but will still keep you from using it for impulse buys.
5. Reduce surprises.
Another way to keep money in your emergency fund is to keep expensive surprises to a minimum. You can do this in two ways:
Look for patterns. When surprise expenses pop up, write it down in a journal. Over time, you’ll get better at predicting and budgeting for these costs. Example: You notice you went to the emergency room every few months because of an old back injury, so you add chiropractic care to your regular budget.
Get insurance to cover your greatest risks. Often, emergencies are related to things that insurance can help pay for, like your health, car, home, and ability to work. If you spend a bit of money on insurance, you won’t have to use your emergency fund and may even feel comfortable setting aside a smaller amount.
Here are some common types of insurance you should consider:
Affordable health, dental, and vision insurance, which cover most people’s medical needs.
Comprehensive auto insurance, which pays for repairs to your car and damage to other cars or property.
Homeowners insurance or renters insurance, which can cover repairs and damage to your stuff from fires, leaks, and more.
Disability insurance, which provides some income if you get sick or injured and can’t work.
6. Save windfall money.
If you’ve set aside as much as you can and just can’t save anymore, that’s great! You’re developing a strong savings habit that will help you for years to come. But if your fund is growing slower than you’d like, keep an eye out for unexpected income, sometimes called windfall money. Examples of windfall money include:
Gifts you receive
Cash back on your credit card
Good tips from happy customers
Tax returns
Because you weren’t counting on your windfall, saving it is a great way to grow your emergency fund.
7. Keep fees low and interest high.
Many banks charge fees for opening or keeping a savings account, but some charge more than others. If you shop around, you could save on these fees or even find a no-fee account. This will help keep more cash in your fund.
Look for credit unions or online banks, because these institutions typically charge lower fees. Just note that you may not be able to access your money from an ATM or debit card, or you may not be able to go to a physical branch. If you’re comfortable banking online and want to keep your emergency fund far enough away to avoid temptation anyway (see tip #5), this could be a great deal.
If you prefer a more traditional bank, you can still find ways to save money on a tight budget. Many banks offer discounts or waive fees entirely if you meet certain requirements — some of which you’re hopefully already doing. Examples include keeping a certain amount of money in your account (tip #4) or setting up automatic transfers to keep money flowing into your account (tip #1).
Insider tip: Keep an eye out for high-yield savings accounts, which earn you more interest on your balance than a standard savings account — up to 10 to 12 times the national average, to be exact.
8. Round it up.
If you’re like many people, you don’t like carrying a bunch of coins around with you, so just drop them in a jar at home. When the jar fills up, add it to your emergency fund.
Don’t use cash much? Many banks allow you to “keep the change” by rounding up your purchases to the nearest dollar and putting the difference in an account of your choice.
Example: You fill up your gas tank using your debit card for $30.65. Your bank charges $31 to your card and deposits $0.35 into your savings account. If you use your card a lot, the savings can add up without you really noticing.
9. Celebrate — and keep going!
Learning how to start an emergency fund with little or no money is hard. Hitting your goals is a huge accomplishment, so don’t forget to celebrate.
Building an emergency fund takes time, and for many independent workers, it’s the big first step toward financial stability. Knowing you have a safety net can help keep you from going into debt during emergencies. It can help you feel more relaxed, and you might spend more time thinking about how to improve your financial situation even more.
The best part is that while you build your emergency fund, you can also build your confidence with money. You’ll have a solid saving habit that can help you tackle bigger (and more fun) goals. Will you pay off a debt, save for a vacation, go back to school, or plan your retirement? Dream big.
