Last updated on January 8th, 2023 at 10:45 am
Having an emergency fund is a smart move for many reasons. It can help you avoid the risky and potentially disappointing decision of living paycheck to paycheck, it can give you peace of mind knowing you have money to back up if/when something goes wrong happened to one of your family members, and it can give you an opening of the game when an unexpected medical or auto repair bill arises.
What are some of the Smart Ways to Build an Emergency Fund?
1. Set up an automatic savings plan
The first step to getting started on your emergency fund is to set up an automatic savings plan.
You can have funds transferred monthly, weekly or bi-weekly from your checking account to a separate savings account.
It may be helpful to set up the transfer on payday so you’re only spending what’s left in your checking account after the transfer is complete.
Also, consider transferring more than you think you can afford.
You probably won’t even miss it!
Finally, make sure the savings account isn’t linked with your debit card. If it is, you may be tempted to spend those “emergency-only” funds on something else.
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Therefore, it would be important if you keep your emergency account private.
2. Set a goal and track your progress
Setting goals and tracking your progress is essential to building your emergency fund because it will help you get a sense of the big picture, stay focused, and take regular steps toward achieving your goal.
Set a goal: Your first step is to set a specific and realistic emergency fund goal that can be achieved within two years.
In addition to setting a longer-term goal, identify short-term goals that are achievable in three months or less.
Track your progress: It’s important to track how much you’ve saved each month—and compare how you’re doing against your larger financial goals.
Visualizing the growth of your emergency fund and seeing it grow with each contribution will keep you motivated.
If you’re not sure where to start, find out which budgeting method works best for you.
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3. Keep your emergency fund money separate from other accounts
The reason this is important is that it will keep you from accidentally spending any of your emergency fund money.
Keeping the money in a separate account means it’s harder to find, and that should keep you from making impulse purchases on stuff you don’t need.
4. Cut out the little things that add up
While big expenses are the first thing people tend to think of when it comes to saving money, a lot of people don’t realize just how much small purchases add up.
Splitting one $20 pizza with a friend? That’s $10, and you probably do that every week. The occasional Starbucks coffee?
Depending on what you get, that could be another $10-$20 per week. Add it all up and you could be spending more than $150 per month on small items!
If your goal is to build an emergency fund in just six months and you spend over $100-$150 per month on these small expenses, then cutting them out will help you reach your savings goal quickly.
To help cut back on those expenses…
Try tracking your spending for at least two weeks or until you can see where most of your money goes.
However, you’ll also find app-based tools like Mint helpful for this task.
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5. Take advantage of windfalls and cash gifts
When you receive a gift from a family member or get an unexpected check in the mail, it can be tempting to splurge on a vacation or luxury item—but that would just be another way of delaying that emergency fund.
It might also be tempting to pay off your debt with this money—however, when you do that, you’re not taking into account what will happen if something happens tomorrow and you’re still in debt.
Sure, it doesn’t seem like something that could happen to you—but it could. Make sure at least some of your windfall goes into savings!
6. Bank on a raise or bonus, then spend the difference
It’s a simple trick, but it works. If you get a raise or bonus at work, but all (or most) of it goes toward building your emergency fund.
Then spend only the difference between your current and projected salary on day-to-day expenses.
This is especially helpful if you get an annual bonus since you can use that money to build up a nice cash cushion for the year ahead.
The same holds if you get regular performance bonuses in addition to your base pay: Put those extra dollars toward savings and stick to your existing budget.
If that requires some discipline, try using a budgeting app like Mint or YNAB (You Need A Budget) to help track everyday spending so that only the amount needed goes toward living expenses.
7. Pick up a side gig for extra income
If you’re having a tough time finding money in your budget to put toward an emergency fund every month, it might be worth considering taking on a side hustle.
With this option, you can give your income a boost and work toward building up an emergency fund too.
Typically, you can earn more money with a side gig than you could with just cutting back on your budget.
There are several ways to make extra money outside of your regular job:
- You might take on freelance work like web design or bookkeeping.
- You could babysit or dog-walk for friends and neighbors.
- You might drive Uber or Lyft after work or on weekends.
- You may even sell your art, photography, crafts, or other items online through sites like Etsy and eBay.
In addition to these ideas, many companies hire mystery shoppers who do secret visits to restaurants and businesses where they evaluate the service they receive as customers.
Other companies often hire virtual assistants who perform administrative tasks from home via their computers.
8. Downsize your living space or possessions to save money on rent, utilities, and more
The average U.S. citizen owns 300,000 objects. This is an astonishingly large number of things to keep track of, on top of the stress that comes from maintaining a home (and paying for it).
Downsizing is a great way to reduce your monthly spending and, in turn, boost your emergency fund.
Many people are making the move from a house to an apartment or from a 3-bedroom apartment to a 2-bedroom. Some people even go so far as moving from a 2-bedroom apartment to a 1-bedroom! Downsizing requires careful planning ahead and getting rid of many possessions that you may no longer need or use; however, the reduced rent and utilities will make this decision worth it in the long run.
9. Pool your resources with someone else to increase your buying power and decrease expenses like rent, food, and utilities
One of the biggest expenses that can be reduced by sharing resources is rent.
By getting a roommate or moving back home with family, you’ll be able to save quite a bit on rent and other utilities.
Some people even choose to move in with friends when they want to save money! There are a lot of benefits—and some drawbacks—to pooling your resources with others, but there is no denying that it can make living more affordable.
Sharing food and buying in bulk are two other ways that you can pool your resources. If you’re able to share a place, as well as food and bills, you could save a lot more than just splitting the rent.
Sharing responsibilities like cooking or cleaning will help keep things fair if you do go this route.
You may not have thought about sharing your emergency fund with someone else, but this could also be an option if it’s something that works for both of you.
10. Think about getting a roommate if you don’t want to move in with family members or friends, but are sure you want to downgrade in square footage (and monthly rent)
If you live in an expensive city, getting a roommate is another way to downgrade your housing payments.
While this option may not be attractive for everyone, it can be a great way to save money if you’re currently living on your own and struggling to make rent.
If you’re uncomfortable with the thought of living with a stranger,
Consider asking a friend or family member you get along with to move in—although it’s still important that you both have a written agreement outlining what each person should pay and when they should pay it.
With any new energy-saving habit, moderation is key. Do too little and nothing changes, do too much and you risk your lifestyle being more frugal than fun! Find the right balance between saving big bucks and enjoying life’s many daily pleasures.
Regular savings is how most people build their emergency funds
If you earn a raise or bonus, make it a habit to keep the extra funds in your emergency fund account.
Even if you decide to celebrate the windfall with some new home decor or an upgraded cable package, at least a chunk of it toward your emergency savings.
If you’re not getting raises but expect them in the future, consider planning around them as if they were guaranteed.
For example, if you know that you’ll receive an annual raise of 5%, calculate how much more money you’ll be bringing home and budget accordingly.
If your raise is projected to be $1,000 per year for the next three years, then figure out how to live on your current salary and save that extra $1,000 each year until it’s time for the next increase.
That way, when the raise does come in, you can use it as another contribution to your emergency fund and stay on track with your goals.