How Do You Build Up an Emergency Fund on a Tight Budget?

There are many deductions from your paycheck, so putting a? percentage toward an emergency fund might not seem like a priority — especially if you’re on a tight budget. However, this financial move is critical to offsetting costs associated with job loss, medical emergencies, home or car repairs, or unplanned travel expenses.??

By Helen Harris?

You can easily spend all of your money each paycheck.?

There are non-discretionary expenses, such as your mortgage or rent,? utilities, groceries, gas and other basic living expenses to factor into your monthly costs. After that, it can be difficult, especially in times of economic hardship, to have much money left over for other discretionary expenses.?

But what if you became ill or were injured and unable to work for some period of time? Even more relevant to today’s point in time: How are you planning financially should you be laid off??

Though it can be nerve-wracking to think of deducting more money from your paycheck, it can benefit you tremendously in the long run to think now about padding, or starting, your emergency fund should you ever need it.??

Why Building an Emergency Fund Is Crucial?

An emergency fund, as defined by Vanguard, is a stash of money set aside to cover the financial surprises life throws your way.?

Some of the top financial emergencies include the following:?

• Job loss or layoff
• Medical emergency
• Unexpected home repairs
• Car troubles or car wreck?
• Unplanned travel expenses

Forbes further clarifies that an emergency fund isn’t a reserve of cash for your future vacation or home but rather should be used strictly for situations like the above.?

It adds that the amount you should aim to have in this account is three to six months of living expenses.??

“Those living expenses don’t include dining out, entertainment, etc.,” reported Forbes. “What are your must-haves? Look at the basics, such as housing, auto, phone, insurance, groceries, credit card minimum payments and basic utilities.”

As for where to hold your emergency fund, there are a few options to explore, including the following:?

• Certificate of deposit (CD): With a CD, you will be locking up your savings for a designated period. CNBC reports that you can find rates higher than 1% in some certificates of deposit offered by banks and that the terms of CDs generally range from one month to five years. However, the longer the term, the more interest the CD will pay.?

To tailor a CD to your savings needs, you can prepare for its lock-in period by creating a “ladder.” A ladder is simply buying CDs at staggering maturities — whether it’s over several months or years.

CNBC gives the following example of a CD ladder:?

• With your emergency fund of $6,000, you put $2,000 in a six-month CD, $2,000 in a 12-month CD, and $2,000 in an 18-month CD.?
• When the six-month CD matures, you invest the proceeds into an 18-month CD. You repeat the process as each CD matures.?
• If interest rates rise, your laddering strategy will benefit from the higher rates.
• High-yield savings account: Forbes reports that this savings account allows you to receive a higher interest rate than a traditional savings account, and leading high-yield accounts earn between more than 2% annual percentage yield (APY), depending on the size of your account and other factors.
• Money market account: These accounts are similar to high-yield savings accounts, but differ in that they sometimes come with a debit card and check-writing capabilities. Forbes reports another difference is that money market accounts generally require a larger minimum deposit to open, and some banks have tiered interest rates based on account balances.

Whatever option you choose, it’s important to keep this account separate from your everyday bank accounts and funds so you won’t have the urge to access the money.?

How Anyone, on Any Budget, Can Start an Emergency Fund?

Particularly, if you are living paycheck to paycheck, Crystal Byrd, economist at USAID, states that you should look for any way to cut your bills — even the small ones.?

“Every little bit helps,” said Byrd. “Take stock of all of your monthly bills and look for ways to cut them. Try reaching out to your car insurance company to see if you qualify for any discounts or if you can combine policies. A reduction to any policy — even as low as $10 — can be siphoned off into an emergency fund. Ensure you have a high-yielding savings account for the emergency fund so it can begin to accrue interest as you are building.”

Hope Sullivan, financial planner at Hope Financial, adds to this, stating that you can look into your everyday habits and decide which ones you can do without and which could potentially be put toward

"Is there a place you are spending money that could be better utilized?" said Sullivan. "Maybe you’re an avid coffee drinker, and three times a week you pick up coffee on your way to work. Cut that down (not out), and put the money you would have spent into your savings. Are you someone who uses cash a lot? Save all your change. It may seem small, but it adds up! And lastly, practice self-control. If you put money into your savings account to save for emergencies, stick to that! Buying new shoes that just came out on the shelf doesn’t qualify as an emergency."

And even if your monthly expenses do include credit card debt or other interest-bearing loans, Byrd assures that you can still make your emergency fund a priority, as well.?

“Sometimes it is not easy to try to prioritize saving, even a small amount, when you are faced with credit card debt, but savings are critical,” said Byrd.?

She states that some people, as time permits and even in the short term, have looked for ways to increase their income to build up their emergency fund. You might decide to take this approach if you are trying to pay down or pay off debt.?

Jessica Weaver, CFP, CDFA, CFS, wealth advisor, founder of the Women's Wealth Boutique and author of “Confessions of a Money Queen,” adds to Byrd’s sentiment on saving regardless of debt — stressing that building an emergency fund is part of forming a new habit.?

“This is a new habit to form, and a new behavior such as saving money takes 63 takes to form a new habit,” said Weaver. “Give yourself some incentives and ways to celebrate as your savings account hits different marks. You can even create a vision board of all the ways you will use your savings in the future to keep you inspired.”?

Weaver states that often, people think they have to wait to start saving money until they are out of debt, or have more income each month. But she states that just starting with $10 a month is better than nothing.?

She also stresses that the key is to start slowly and that you can reevaluate your emergency fund contributions every month or few months and gradually increase that amount.?

If you are living paycheck to paycheck, Sullivan echoes Weaver's advice and states that the best thing to do is to put money away each week. She says that as long as you're putting something aside, you are making progress toward building up a substantial emergency fund for your future.

Weaver also adds two other healthy financial habits: (1)You should start tracking your cash flow, which is your income minus all your expenses. (2) Calculate your net worth (your assets minus your debts or liabilities).?

By doing these things, you'll begin to see where you have been spending your money and can then prioritize where you want to reallocate funds and also possibly find creative ways to lower even your fixed expenses (i.e., cutting out memberships you don't use, negotiating your cable bill or efficiently paying off your debt).?

“The important thing is to have a grasp of the whole picture: How much debt? What types of debt (student loans, credit card, auto loan, mortgage, etc.)?” said Byrd. “What are the interest rates and the payment terms for each one? Once you have a grasp of the full picture, you can begin to chisel away at debt, even if little by little but still putting money away [in your emergency fund]. If you are consistent, the small savings can and will grow over time.”

And as you begin to contribute to your emergency fund, one key aspect to remember is that you're probably not alone in your struggle to get started with this aspect of your financial life.

In fact, Sullivan stresses that it is critical that you learn to confide in others who are also experiencing what you are or people who have overcome the feeling of living paycheck to paycheck.

"Having a support system is going to help guide you and hold you accountable in not overspending and putting money into savings," said Sullivan.

Top Takeaways

How Do You Build Up an Emergency Fund on a Tight Budget?

• An emergency fund is a stash of money set aside to cover the financial surprises life throws your way.?
• It’s important to keep this account separate from your everyday bank accounts and funds so that you don’t have the urge to access the money.?
• Even if your monthly expenses do include credit card debt or other interest-bearing loans, you still can and should make your emergency fund a priority.
• Start contributing to your emergency slowly and reevaluate your contributions every month or few months and gradually increase that amount.?
• “The important thing is to have a grasp of the whole picture: How much debt? What types of debt (student loans, credit card, auto loan, mortgage, etc.)? … If you are consistent, the small savings can and will grow over time.”