How to build emergency funds with a small income?

Having extra funds available for emergencies is essential for your financial well-being. Have enough money to be able to covering three to six months of expenses is a common recommendation because they can be very helpful to you in times of trouble. For many people, these emergency funds can add up to a daunting number — and can discourage even the most well-meaning saver.

But don't give up before you start! The savings game is mostly psychological – and you can win it. Even if you're starting from scratch, putting money aside regularly, even in small amounts, will eventually allow you to reach your goal. It just takes time and a little discipline.

If you're ready to get started — and especially if you think you can't — here are some suggestions that might make building your emergency fund easier.

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What is an emergency fund?

The first step along the way is to understand what an emergency fund is. An emergency fund is money you have saved for the sole purpose of helping you maintain your normal life despite the emergencies that life throws at you.

Most of the time, you shouldn't touch the emergency fund at all – it just sits there earning some interest and waiting until you actually need it. When you lose your job. When a device breaks down. When your car needs a repair.

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Very often, people who don't have an emergency fund see the idea of ​​having to save money as a form of punishment – ​​after all, money put in a savings account and blocked is money. money that cannot be used for living?

You don't have to completely panic if your car breaks down or you lose your job or you suddenly need to replace a water heater.

Instead of having to find a way to put those expenses on a credit card or ask a friend for money to help you out, you can just pay the bill – no worries.

Another issue I often hear about with emergency funds is the temptation people have to spend the money on things that aren't emergencies.

They see they've racked up several hundred dollars in savings and they start thinking about buying a flat screen TV or going on a trip – and that's exactly what they're doing.

If you want to have a savings account for the big splurges, that's great – start a “splurge fund” too, if that makes sense to you. It is important, however, to leave the emergency fund completely alone until you need it.

Drop some money in there and don't even look at the balance until a real emergency occurs.

First steps towards building up emergency funds

Set your initial goal low

So what is the first step? Many people set a gigantic goal for their emergency fund upfront and then find it very difficult to get there. Eight months of living expenses is a huge goal, one that will take years to reach – and along the way, you might get discouraged.

Instead, a great way to start is to set yourself a more reasonable goal. Make it your initial goal to have an emergency fund of only $ 250 ou $ 500.

It's a goal you can achieve in just a few months and yet it's an amount that can make a huge difference when you have an emergency.

Then, break that goal down into smaller chunks. You may be able to save $ 25 per week.

If so, you may have an emergency fund of $ 250 in just ten weeks, so you can make that your overall goal. Maybe you can put aside $ 40 per week, which would bring you to the goal of $ 500 in three months.

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My advice is not to set your savings plan too high initially. Whether in terms of the amount you can save each week or the overall amount. This should challenge you a bit, but not be a simply unattainable number.

Find your breathing space

It's great, do you think, but where will I find $ 25 per week ? I can barely make ends meet now.

It's a fairly typical sentiment from people who are just beginning to turn their financial situation around. There are plenty of ways to earn extra money throughout the month. You take a look at these strategies: How to make money online.

Ways to start your emergency fund

Ask for a rate reduction on your credit cards

If you have a credit card balance, lowering your interest rate will directly save you money each month. Just flip your credit card, ask to speak to a supervisor, and simply ask for the rate to be reduced. Suggest that you consider transferring your balance off the card.

Speaking of which, you might consider transferring that balance on an interest-free card for transfers, which can help you pay off that debt faster. Check out this article to find out how you can globally reduce your bank charges.

Automate your savings

Out of Sight, Out of Mind: The easiest way to save money is to never touch it in the first place. Most employers offer direct deposit, and some will even deposit to more than one account.

Open a separate account just for your emergency fund and have your contribution amount automatically deposited, either by your employer or your bank.

Use a savings account or another type of account that you cannot easily access, unlike a current account. Chances are you won't miss it.

And don't continuously monitor the account balance, it will only make the growth smaller and slower. Forget it and let time do its work.

Here's a comprehensive guide to help you learn more about the bank accounts you can create.

Do not increase your monthly expenses or open new credit cards

Once saving becomes automatic, don't be lulled into a false sense of financial security and let spending rise again.

For example, if you give up a new pair of shoes every month only to replace it a few months later with a new monthly buying habit, you're not saving at all!

If you still have $ 50 moreover each month, the amount of your savings deposit may be too low. If you do not have $ 50 in addition, you may have a credit card balance. Neither is productive.

You shouldn't stop enjoying life while you're building your emergency fund, but you shouldn't lose sight of its importance either.

Having an adequate emergency fund is essential to your financial well-being. Be realistic, but try to reach your ultimate savings goal as quickly as possible. That alone could make life more enjoyable.

Use a shopping list

Ten minutes of planning before you go will save you at least ten minutes in the store, and it will help you stay focused on the things you really need, thus reducing your grocery bill because you put less unnecessary things in the basket.

Turn one splurge per month

Instead of going out for an expensive dinner once a month, turn that dinner into a home-prepared meal. You'll save quite a bit, even if you're cooking something really fancy in your own kitchen.

Don't save too much

Or, more accurately, don't spend too much of your savings on your emergency fund.

By definition, an emergency fund is money that you can access quickly. This means that you most likely store it in a low performance vehicle like a savings account which pays an extremely low interest rate.

For this reason alone, you should stop contributing to this account once you have reached your ultimate goal.

Start depositing into an account where it will start making money on its own – ideally your retirement accounts, where time will allow it to bear the most fruit.

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Set up a carpool

Find someone who lives fairly close to you and works where you are and start carpooling together.

Even if you can only do it a few days a week, you'll significantly reduce your travel costs, and it'll be much harder to stop for those impulsive splurges.

Use public transportation

Better yet, get into the habit of using public transport for your daily trips. Most metro areas have surprisingly good public transit options – and they're much cheaper than driving yourself.

Go by bike

Want to start getting in better shape? Do you live just a mile or two from your job? This is an ideal situation to buy a bike and start using it for commuting instead of wasting your money on gas and car maintenance.

Reduce unnecessary monthly bills

Do you subscribe to Netflix but rarely use it? Cut it! Do you pay for premium cable channels that you never watch? Cut them!

Snowflake

Very often, when people receive some unexpected money, they tend to spend it without thinking about it. They decide not to stop for a coffee, but then choose to spend it later on takeout, for example.

Instead of spending this "found money", take some or all of it and immediately put it into your emergency fund. If you have services online banking, it's quite simple: just transfer them from your current account.

The key here is to actually save those savings. Instead of just spending the money on something else, put that money aside in your emergency fund.

If you find that you save more than $ 50 per week with these tactics, put more into the emergency fund or increase the amount you put into your retirement savings.

Make it automatic

So you have reduced your expenses by $ 50 per week, but now you have that money there and it's tempting to spend it on something more exciting than an emergency fund. You are tempted...

…but you don't have to be tempted. Instead, you can set up an automatic savings plan to sweep that money straight out of your checking account and into your savings account that you use for an emergency fund.

If you haven't already, I recommend setting up an online savings account at a separate bank from the one you normally do business with for your emergency fund.

Doing this not only allows you to search for a bank with good service and good rates of savings account , but it also leads you to put the money in a place that is not so easy to access.

You can't just run to the ATM or stop at the ATM and withdraw money – you have to go to your computer, order a transfer and wait a day or two to access the money, which is more than enough time for you to think carefully about what you are doing and not to be carried away by impulse.

Set reasonable milestones along the way

In a few months, you'll hit that first milestone — and you'll feel great. This account will contain enough money to start earning some interest and you will start to feel in control.

Now is the time to continue. Set another goal : an emergency fund of $ 1 000. Keep this automatic savings plan in place.

Once this goal is reached, aim for one month of living expenses. Then two months. Then three. And keep watching this emergency fund grow.

Obviously, when you do that in an emergency, hit that fund. Don't put your car repair bill on the credit card.

Don't start living off plastic while you're between jobs. Instead, continue to live a financially stable life through your planning ahead.

In summary…

You might find that it's a lot of fun – so you might start looking for other ways to save. Just keep setting goals for yourself and keep pushing yourself a little bit to get there.

Before you know it, your life won't be disrupted by this kind of emergency – and you'll sleep much better at night knowing this. For all other resources to help you better manage your personal finances, just check out our shop.

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