Nothing in this life is guaranteed which is why you have to be financially prepared for whatever unexpected circumstance that may happen to you and your family. Sadly, A 2018 Federal Reserve survey reveals that 4 out of 10 Americans couldn’t afford a $400 emergency expense. This means that those who don’t have that amount in hand would either have to incur debt or sell some of their belongings to cover for it. Relying on debt during these times often leads to severe financial hardship.
To prevent a financial disaster from happening, having a substantial amount of cash within your reach is a must. An emergency fund is essentially a pool of money that you can tap on when something unexpected happens such as unemployment, major home or car repairs, medical emergencies, and even death in the family. This serves as your buffer that covers your basic household expenses and other necessities until you get your finances back in order without having the need to take out a loan or rely on your credit cards for survival.
If you are living from paycheck to paycheck, starting a cash reserve for emergency purposes may seem a difficult feat but it can be done. Here are ten savvy ways to build your emergency fund on a shoestring budget:
1. List down your priority expenses
Get a clear picture where your hard-earned money is going. To do this, you need to list your monthly expenditure then sort them according to priority. This will help you properly allocate your salary and free up some cash to save for a rainy day.
Basic needs like rent or mortgage payment, groceries, and utilities (water, heat, and electricity) must be on top of your list. If you have a family, take their needs into account as well. Education and health care should also be a part of your spending priorities. As for transportation, see if taking public transport would cost you lesser than driving your car going to and from work.
Once done, cross out all the nonessential items such as magazine and cable tv subscriptions, gym membership, and other miscellaneous items that you can do without.
2. Set the right goals for yourself
A lot of people tend to get disheartened and abandon saving up for the rainy day when they don’t get to achieve their target figure in a short period of time. What you need to do is to plan out your goals intentionally to ensure your progress. Here’s how:Set a target amount. Refer to your list of priority expenses. Your emergency funds should cover six to twelve months of expenses. If your total household expense is $650 monthly and you want to set up an emergency fund that’s good for six months, then you will need $3900. If you want to add a few dollars more on that figure, then you may do so. Remember, you are saving for the unexpected; you’ll never know what other important expenses you may have so it’s better to have more than your target amount than settle for less.
Commit to putting in a fixed amount on a regular basis. If you’re on a tight budget, chances are you can only set aside a small amount for your emergency fund. That is okay. The saying “slow and steady wins the race” holds true when you are trying to save on a shoestring budget. It doesn’t matter if you can only save $20 for your emergency fund as long as you can commit to doing it consistently.
Give yourself a reasonable timeframe. Unless you’re expecting to receive a huge amount that you can put entirely on your savings, raising a $4000 emergency fund in the span of two months is impossible. Set a time frame based on your target amount and a fixed amount that you’re comfortable to save regularly from your paycheck. Here’s an example: if you get paid biweekly and decide to save $75 from your salary, this means it will take you roughly around 54 months or 4 years and 5 months to reach your desired amount. Don’t be daunted by the length of time it will take you to complete funding your emergency stash. Keep in mind that all financial goals require patience and persistence to succeed.
3. Spend like you’re already in dire financial straits
When you’re in a precarious financial situation, you do your very best save as much as you can and spend only on what is truly important. Why not practice doing the same even if money is not an issue at the moment?
One practice that most people with money problems do is cutting back on their expenses. Simple things such as taking homecooked lunch to work, making your own coffee instead of buying takeaway every morning, and paying your bills on time to avoid late fees will help you get additional savings.
Another thing that you need to do is to stick on a budget without having to rely on your credit cards or personal loans to make ends meet. Try to live below your means until it becomes a habit. This will give you full control over your finances no matter how meager your income is. Soon, you will be able to sustain all your needs and save at the same time without the burden of debt.
4. Put your emergency fund in an interest-earning savings account.
A savings account is the best place for you to keep your emergency funds so you can easily access your funds when you urgently need it.
When choosing a savings account, pick one that offers competitive rates and doesn’t have monthly fees or require a maintaining balance. Having a high-yield savings account will you grow your emergency fund over time.
5. Pay off your debts.
Debt is the biggest roadblock to anyone’s financial goals. According to Tendayi Kapfidze, chief economist of The Lending Tree, 10% of an average American’s disposable income goes toward consumer debt payment such as credit cards, personal and student loans. That’s a lot of money! Imagine if that huge chunk of your salary goes towards your savings instead of loan payments. You’ll be in a strong position to take on any financial disaster that comes your way.
Reduce your debts significantly by paying more than the minimum amount on your bill. You may also opt to sign up for a debt settlement program if you feel like your debts are getting out of hand but make sure that you choose a reputable debt relief company to help you handle your debts. The sooner you pay off your debt, the sooner you will have more money in reserve for the unexpected.
6. Keep a money jar
Every penny counts. Get all the loose change that you have and keep them in a jar. If you fill a jar before the year ends, get another one! You’ll be surprised by how much you’ll be able to save just by collecting all those pennies. If you have kids, this is a fun activity to do them. You can also take the opportunity to teach your kids about the value of money and the importance of savings.
7. Pay everything in cash.
Credit cards may give you the power to spend even when you don’t have the money but it will be detrimental to your finances as your bills pile up. So the next time you go shopping, leave your credit cards at home to avoid any impulse purchases and unnecessary increase in your credit card bills.
8. Fund it with your tax refund
The IRS has reported that the average tax refund issued in the first three weeks of the 2019 tax season is at $2,640. You may already have plans on how to spend your tax refund but if you are intent on setting up an emergency fund soon, saving your entire tax refund is a fantastic way to start.
9. Find ways to augment your income
Try to look for other sources of income to help build up your emergency fund. Getting a part-time job, holding a garage sale to sell things that you don’t need at home, and even taking those online surveys can help you give your emergency savings a boost.
10. Revisit your goals
Your priorities may change over time so make sure to re-evaluate your goals regularly so you can make the necessary adjustments to fit all your needs and see if you are on track to reaching your target amount.
If you find yourself falling behind your goal, do a quick assessment of your current expenditures. Perhaps you got some other expenses that you have not accounted for when you were planning out your spending priorities. Or maybe you simply just went over your budget. Whatever the reason is, you need to be aware of it.
Keep in mind that your emergency fund is not meant to be spent on unplanned leisurely vacations and debt payment. Establishing a sufficient emergency fund guarantees that you and your family will be financially protected during difficult times. Spend it wisely.