You probably already know how important it is to build an emergency savings fund, but that doesn’t mean you’ve started. It’s not always easy, especially when you are trying to figure out how to build an emergency fund on a limited income. But it’s very important to have a savings for emergencies because you just never know what could happen.
Most people don’t like thinking about worst-case scenarios but it’s important that you are as prepared as you can be for unforeseen expenses that would otherwise – quite literally – break the bank.
Let’s first define what an emergency fund is and how it is used so that we are on the same page. An emergency fund is a small cushion of savings to help you in the event of an emergency or unexpected expense. Maybe your car breaks down, or someone in your family gets sick. You could get unexpectedly laid off from work, or have a client not pay if you’re self-employed.
Any type of event that could cause a financial crisis is covered under the emergency fund. A small repair might not dip into your savings all that much, but a larger crisis will probably include bigger expenses. In any case, you go to your emergency fund first and then replenish it afterward when you can.
How much should you save for your emergency fund on a limited income?
Experts recommend you try to save between three and six months’ worth of living expenses in your emergency fund. In addition, you should also create an emergency budget. Your emergency fund will help you for smaller, short-term emergencies but if something big happens, like losing your job, your money will run out quickly without following a proper budget. When you’re living off your emergency fund, you want to keep those expenses as low as possible.
Here is how to build an emergency fund on a limited income:
- Set a goal – Your first step is to create a goal so that you know what you’re working toward. You need to know what you’re trying to save. Not having a goal keeps things too vague, and will make it harder for you to reach. Make sure your goal is realistic. It’s okay to start small and then build up over time.
- Save first – Don’t wait for what’s left over to save. Pull out your savings first. This is the part that people have the most trouble with when they are already on a limited income. It can seem very difficult to save money when you already don’t have enough money to go around. However, it’s essential that you find a way.
- Automate whenever you can – If you can automate your savings, you can just set it and forget it. You can set up an automatic withdrawal from your bank account to savings each month, or for a certain portion of each paycheck to go into savings.
- Think creatively. Have a yard sale and put all of that money into your emergency fund. If you don’t have much to sell, add inexpensive baked goods. One family I know makes money in October by making and selling gourmet caramel apples. Maybe you can make homemade bread or gluten free baked goods for people in your home town. Find a creative one-time way to make some money and set that aside for your emergency fund.
- Pay down debt, but keep your cushion – While it’s good to want to pay off your debts, it’s also important that you keep some cushion for emergencies. You don’t want to put everything you have into paying down the debt, and leave yourself in a bind should an emergency happen. That’s the whole point of the emergency fund. So, make sure you’re still adding to your emergency fund while also paying down those debts.
- Stash any windfalls – If you come into any extra money, such as an inheritance or a tax refund, be sure to stash that money away into your emergency savings fund. Avoid being tempted to blow it all on things that aren’t important.
- Cut expenses where you can – Look for places to spend less and cut expenses. The money you save can be added to your emergency budget. It also means you won’t have to live so financially tight while you are still saving money.
Now that you know how to build an emergency fund, all that’s left is to get to work. Make a commitment based on the ideas above, and then just remain consistent with it. It may seem tough at first, but the longer you do it, the easier it will be. And little by little you will be adding money to an emergency fund on a limited income. You can do this.