An emergency stash of savings is a must for heading off financial rainy days but if you don’t have one yet, you’re not alone. A Bankrate survey published earlier this year found that just 38% of Americans are equipped to handle the occasional money mishap, such as a car repair or an unexpected visit to the doctor.
This can be an even bigger problem if you’re trying to pay off debt. When you’re focused on paying off high interest credit cards or getting rid of student loans, saving money may be the last thing on your mind. The downside of forgoing building your emergency fund as you tackle debt is that it leaves you wide open to financial trouble if an unexpected expense creeps up.
Finding a way to build your savings as you knock out those debt balances is a balancing act but it’s not impossible. Knowing what steps to take allows you to do both without falling short of either goal.
Set your emergency fund target
A healthy emergency fund covers you in the event of a job loss, sudden illness or other financial catastrophe where you’d need to tap into some extra cash. Keeping your savings in a separate account and making your deposits automatic are the easiest ways to grow your balance.
The first step in saving for emergencies is deciding how much money you need to get started. The financial pros suggest having anywhere from three to eight months’ worth of expenses saved, but your ideal number may be more or less than that. How you answer these 5 questions can help you determine how big your emergency cushion needs to be:
1. What’s the bare minimum needed to cover my monthly expenses?
In the worst-case scenario, your emergency fund should be sufficient to pay all of your bills if something major happened like a job loss or an injury that prevented you from working for an extended period of time. Figuring out exactly what you’d need to get by for a month is a good starting point for settling on an emergency savings goal.
When you’re adding up your expenses, focus on those things that would need to be paid first. That includes your rent or mortgage payment, utility payments and insurance. From there, you can add on things like groceries and gas. If you have debt, you’d also want to factor in your payments for that but you wouldn’t include extras that you could do without, such as entertainment or dining out.
If your monthly nut isn’t that big and you could find ways to cut your costs even further if you needed to, then a smaller emergency fund may be sufficient. Three months’ worth of expenses is a good baseline and if you’re already living below your means it’s usually not too difficult to save that amount in a relatively short span of time.
2. Am I the only person I need to support?
When you’re single, it’s easier to keep your overhead costs fairly low since you can directly control all of your expenses. If you’re married or have kids, the cost of maintaining a household is exponentially higher. As a result, your emergency fund typically needs to be a bit bigger to accommodate the added expense of taking care of multiple people.
Increasing your emergency savings to cover six months’ of expenses is a wise move, especially if you’re the sole breadwinner. If both you and your spouse work, having that added savings can help your income stretch even further if one of you ends up out of a job temporarily. Single parents would also want to use six months’ worth of savings as the minimum for building their emergency fund since there’s no second income to fall back on.
3. How quickly could I find a new job if I had to?
According to the Bureau of Labor, the average unemployment period lasts for nearly 31 weeks. That means for someone who’s been laid off or let go for any reason, they’re looking at close to an eight month stretch before they find a new position.
Building your emergency fund to the point where it covers eight months’ worth of expenses is a lofty goal but whether you need to go that route depends not only on your expenses and family situation but your professional background as well. If you work in a field where jobs are plentiful and you’re well-qualified to work in a number of positions, the odds of finding a new gig sooner rather than later are likely to be good. When that’s the case, an eight month emergency fund might be overkill.
On the other hand, if you’re self-employed or openings are scarce in your particular industry, finding something comparable to your old job may be more difficult. In that scenario, eight months of expenses would be necessary to hedge your bets in case you can’t find something right away. You might even consider bumping it up to 12 months just to be on the safe side.
4. Do I have any back-up sources of income?
When you’re gauging the ideal size for your emergency fund, you need to factor in what other sources of income would be available if you wound up out of a job or unable to work. For example, if you’re eligible for unemployment that could bring in a few hundred dollars a week to help fill the gap.
You should also consider any investments you own that could generate some income. If you hold a substantial amount of stock, for instance, that’s something you could sell if you needed to. You’d likely have to pay taxes on the earnings but it’s an option you could turn to in a pinch.
The key is to look at every possible opportunity for bringing in money. Starting a side hustle, picking up freelancing work or selling off things around the house on eBay can generate some income so you don’t drain your emergency fund too quickly. The more creative you can be about finding alternatives to pay the bills, the less money you can get away with having in emergency savings.
5. Could I use credit if my savings fall short?
Using a credit card or home equity line isn’t an ideal replacement for an emergency fund, but it’s still an option worth thinking about if you haven’t been able to save a huge amount of money yet. The biggest drawbacks of using credit for emergency expenses is having to pay interest on whatever you charge, which can take a bigger bite out of your wallet in the long run.
The other issue to keep in mind is whether you’ll be able to make the payments on the debt until your income gets back on track. With a home equity line, the repayment terms are usually pretty lenient and you may even be able to get by with paying just the interest each month at the outset. Credit card companies, on the other hand, typically require you to pay 1 to 2 percent of the balance each month at a minimum.
Consider your comfort level
A three-month emergency fund may be plenty to cover your expenses but that won’t matter if you’d sleep better at night knowing you had six months’ worth of savings stashed away instead. The final and perhaps most important thing to factor in when choosing the size of your emergency fund is what you really need to feel financially secure when a rainy day comes along.
Once you’re set on how much you need to save, the next step is to figure out the time frame for saving it.
For example, let’s say your expenses come to $3,000 a month and you want to build a three-month emergency fund. Your goal is to save the whole $9,000 over the course of two years. That breaks down to $375 a month you’ll need to set aside to hit your mark. Now that you’ve got a solid number to work with, you can begin looking for ways to tweak your budget to accommodate saving, even if you are trying to pay off debt at the same time.
5 Painless Ways to Build an Emergency Fund
1. Make your debt less expensive
If you’re paying 10, 15 or even 20 percent on some of your debts, that’s going to significantly slow down your progress when it comes to clearing the balances. It can also affect how quickly you’re able to save if you’re having to pay extra on the debt to combat the high interest rates.
Knocking off some of the interest makes it easier to get rid of the debt so you can free up extra cash to save. There are a couple of different ways to reduce your rates, starting with a zero interest balance transfer. At a minimum, card issuers are required to extend zero interest offers for six months but some cards give you up to 18 months to pay it off before the regular rate kicks in. Just keep in mind you’ll have to pay anywhere from two to five percent to make the transfer.
Another option is to consolidate your credit cards or other debts into a home equity line of credit. This is a good alternative if you’ve got equity in your home and you’re not able to take advantage of a balance transfer. Rolling your debts onto a home equity line does mean you’ll pay interest but it’s usually at a much lower rate compared to a credit card and it may reduce your overall monthly payment. If you’re paying less on your debt, you can redirect the extra money to your savings temporarily until your emergency account is fully funded.
2. Use Windfalls Wisely
The average tax refund for 2015 was just over $3,000, which is a decent sum of money when you’re trying to increase your emergency fund or pay off debt. The longer you take to decide how you want to spend your refund, the more interest you’ll pay on the debt and the longer it takes to save. Splitting the difference is the easiest solution and it gets you a little closer to both goals.
[inline-ad]The same goes if you get a raise at work. Instead of letting the extra money be absorbed into your budget, which is what inevitably happens when you suddenly find yourself getting a bigger paycheck, you can put it to work by halving it between your debt and savings. Even if it’s only a few dollars every pay period, it can make a significant difference in how quickly you make progress.
Any time you get extra cash that you’re not expecting, you should resist the temptation to spend it and aim to save it instead. That goes for windfalls large and small, whether it’s a $5,000 tax refund, a 5% pay raise or a $20 birthday check from your grandma. If you’re willing to get a little creative, you can even create mini-windfalls of your own without a lot of effort.
For example, let’s say you’ve budgeted $75 for your weekly grocery shopping trip but one week you only spend $72. Since the extra $3 is already accounted for in your budget, you have the option to go ahead and spend it or you could use it add to your emergency fund. If you apply the same rule to all of your monthly expenses you can easily add a dollar here and a dollar there to your savings as long as you stick to your monthly spending plan.
3. Change Your Witholding
Speaking of taxes, If you normally get a tax refund back every April that means you’re paying too much in taxes during the year. That’s effectively the equivalent of giving the government an interest-free loan. Adjusting your tax withholding with your employer can put some money back into your paycheck, which you can then funnel into your emergency savings account.
Before you make any changes to your withholding, you need to make sure that you’ll still be covering your tax liability. Otherwise, you could end up owing Uncle Sam big money at tax time. Plugging your income, exemptions, deductions and filing status into the IRS Withholding Calculator can give you an idea of how much you need to have taken out each pay period.
Once you figure out what the appropriate amount is, you’ll just have to fill out a new W-4 with your employer to complete the change. Even if adjusting your withholding only nets you a few extra dollars to save a month, that’s money you’re not having to carve out of your budget to add to your emergency fund.
4. Cash in on credit card rewards
Using a rewards credit card to pay for things is a smart move as long as you’re paying the balance off in full each month to avoid interest. Some cards offer points or miles but others offer cash back. That’s basically free money you can use to pad your emergency account.
If you’re shopping around for a cash back card, there are a few things you need to pay attention to. First, there’s the rewards structure itself. Certain cards allow you to earn more cash back when you spend in specific categories while others pay a flat rate on everything you charge. Ideally, you want to pick a card that allows you to maximize the cash back you’re earning based on your spending style.
Next, you need to look at the interest rate and fees. Assuming you don’t plan to carry a balance, the interest rate may not be that important, but you don’t want to choose a card that charges you a high annual fee. If you don’t use it that often, the fee can easily negate any rewards you might be earning.
5. Negotiate lower payments
If you think that all of your monthly bills are set in stone, you may be missing out on opportunities to add to your emergency fund. Taking the time to call up all the companies that you pay money to each month to ask for a better deal is well worth it if it creates some wiggle room in your budget.
For instance, if your account is in good standing and you’ve been a loyal customer for years your credit card company may be willing to cut you a deal on your interest rate. You may also be able to get a concession from your insurance company or utility service providers if you’ve always paid on time.
If you run into someone who’s not willing to budge, that’s a sign that you need to shop around to find a better deal. Changing over your car insurance or cell phone plan takes a little work on your part but it can pay off if the end result means you’re spending less and saving more each month.
6. Switch to a new bank
Banks make money by charging customers fees, which can work against you when you’re trying to save. If you end up getting hit with the occasional overdraft fee or being penalized for failing to maintain a minimum balance that’s less money you have to add to your emergency fund. Moving your accounts to a bank without as much red tape can eliminate the problem.
In terms of being the most fee-friendly, online banks usually have the edge over brick and mortar banks because they have fewer overhead costs to pass on to the customer. The drawback of going online, however, is that there’s no branch to go to when you need one. That can be an issue if you have to make a big cash deposit or you need something that requires a banker’s signature, like applying for a loan or having documents notarized.
Taking the time to compare what’s available can help you find the bank that’s the best fit. Just be sure to review the fee schedule carefully to look for any special requirements or hidden charges that could make the move more expensive.
As you can see, growing your emergency fund doesn’t always require making huge financial sacrifices. Rather than revamping your entire budget, you may be able to bump up your savings just by looking for extra money that’s right under your nose.
Start small with your emergency fund
If you are dealing with an overwhelming amount of debt, or even if you just unsure of where to start, looking for extra money in your budget to save may seem like an insurmountable task. If all you have to work with is $10 or $20 a week, you may think it’s not even worth it to try. But, you shouldn’t give up. Those small amounts will add up over time and it helps you to build the savings habit.
Once you’re able to cross another debt off the list, that’s more money you have to attack the next one and add to your savings at the same time. The key is to get the ball rolling, even if you’re just nickel and diming it at first. Seeing your debt balances go down and your savings balance increase can be all the motivation you need to keep going.
Even though experts recommend having three to six months’ worth of expenses tucked away for emergencies, that can be a daunting goal to work towards when you’re starting from zero. Aiming for $500 or $1,000 instead is less intimidating and it can be done in a relatively short period of time. If you’re ready to jumpstart your savings, here are four tips for establishing a decent cash cushion in under a month:
1. Trim the fat
Coming up with the money to build your emergency fund may be easier than you think. In fact, it could be right under your nose but you have to be willing to look for it.
Your first stop for finding the cash is your monthly budget. If you’re not using a budget to track your income and spending, you need to get one pronto. The Internet is full of free and inexpensive budgeting spreadsheets you can use or you can always let an app like Mint do the work for you.
When you’re looking at your budget, take a look at the most obvious places you can cut back on first. For example, do you really need to spend $150 a month on that deluxe cable package when you rarely watch TV? Can you eat at home every night instead of going out?
Once you’ve eliminated non-essentials, go back a second time and look at those expenses that are more or less fixed to see if it’s possible to whittle them down.
For example, you may be able to score a better deal on your car insurance by moving to a different insurer.
When you’re in debt, making it less expensive can free up some extra cash you can put towards your emergency fund. If you’ve got student loans, consider refinancing them, which can reduce your rate and your monthly payment. Refinancing your mortgage is another option if you think you can get a better rate.
Finally, skim your budget for those sneaky smaller expenses that drain away extra money you could be saving. That includes things like magazine subscriptions, banking fees and recurring charges for “trial” subscriptions that have expired. Since your goal is to get an emergency fund together in 30 days or less, you need to be as ruthless with your budget as possible.
2. Boost your income
Cutting back on what you’re spending is a step in the right direction towards building your emergency fund but it shouldn’t be your only focus. Taking action to increase the amount of money you’re making over the next month is another important part of the puzzle.
So how do you go about beefing up your paycheck? For starters, you could ask for a raise. Whether or not you’ll be successful, however, really depends on how long you’ve been at your job, what your track record is and what your employer’s policy is on raises.
A less challenging option is to simply step up the number of hours you’re working. Keep in mind, however, that this only works if you’re paid by the hour versus being a salaried employee. In that case, you’d need to look into a part-time job to bring in a few extra bucks.
Starting a side hustle is an alternative way to make extra money if your schedule won’t allow you to work a part-time on top of your regular gig. A side hustle could be anything from walking dogs to babysitting to freelancing online and you can cater your hours to your schedule. Just remember that once you hit $400 in earnings from your side gig you’ll have to pay taxes on the money you’re making.
Finally, you could look into selling your extra stuff to make a few bucks for your emergency fund. Listing items for sale on eBay requires paying a small fee but it can be worth it if you’ve got a lot of stuff you want to unload. If you’re not that tech-savvy, a good old-fashioned yard sale can just as easily do the trick.
3. Keep your emergency fund separate
Streamlining your budget or making more money won’t do you any good if you’re not committed to saving the extra cash you’ve got coming in. Setting up a separate savings account is a must if you want to see your emergency fund grow over the next 30 days.
There are lots of different savings vehicles out there and you need to know how they differ to make sure you’re choosing the right one. A certificate of deposit, for example, may come with a higher interest rate than a regular savings account but you won’t be able to get to the money until the CD matures. That can be a major drawback if an emergency does come up.
Ideally, you want to keep your savings in an account that offers convenient access and a decent interest rate. For that, you should look at opening a savings account online.
Online banks have fewer overhead costs than the brick-and-mortar versions which means they can afford to pay their customers more in interest. Just be sure to review the fees carefully so you know exactly what the account is going to cost you.
4. Put your savings on autopilot
Saving money is a habit and like any habit, it takes time to develop. Automating your savings makes it a little easier to get used to. Scheduling automatic transfers to your savings account on a weekly or biweekly basis also ensures that you don’t have a chance to spend the extra money in your budget.
Another easy way to trick yourself into saving is to just round up every transaction you make with your debit card. If you spend $35.47 at the grocery store, for example, round up and sweep the extra $0.53 into your savings account. It’s like having a virtual change jar and you might be surprised at how quickly it adds up by the end of the month.
The Bottom Line
An emergency fund is a financial insurance policy of sorts and the sooner you get one, the better. Saving a $1,000 or so in 30 days or less is a reasonable goal that just about anyone can achieve. The key is to be creative about finding the money and committed to saving it. Once the month is up, you should be well on your way to building up an even bigger savings buffer.