Creating an Emergency Fund on a Budget

Estimated read time: 6 minutes

You might not know what it is, but an emergency fund is essential. We know it can be hard to build an emergency fund, but a lot of things worth doing are tough. Creating an emergency fund on a budget is entirely possible, and we're going to show you how.

What is an Emergency Fund?

An emergency fund is money set aside for an unexpected, urgent expense. An urgent expense could include things like a vehicle or home repair, a medical expense, unexpected travel (to help a sick loved one or attend a funeral), or a period of unemployment.

Why You Must Have an Emergency Fund

If you don't have an emergency fund, you're not alone. Forty percent of Americans could not come up with $400 to cover an emergency expense. And almost 80 percent of American workers live paycheck to paycheck.

If you have no emergency fund and you live paycheck to paycheck you are in a very precarious position. One blown head gasket (that's an essential car part for any of you city dwelling non-drivers like me) could set off a chain reaction with far-reaching consequences.

If you can't get to work, you won't be paid. If you're not being paid, you'll fall behind on your bills. Falling behind on bills can mean racking up late fees, interest charges, utilities being shut off, and possibly losing your home. If you miss too much work, you could lose your job, too.

So creating an emergency fund is, well, an emergency.

How Much?

Okay, take a deep breath. The ideal emergency fund contains 3-6 months' worth of expenses. So if your monthly expenses are $2,000, your emergency fund should contain $6,000-$12,000. It's a lot, we know. But there is some good news.

First of all, monthly expenses don't mean all of your monthly expenses. It only means essential monthly expenses. Things like housing, utilities, transportation, food, and insurance. It does not include things like cable, restaurant meals, and entertainment.

Secondly, you don't have to do this overnight. Creating an emergency fund on a budget is kind of like losing 100 pounds. You don't lose 100 all at once; you lose 1 pound 100 times. Thinking of it that way takes it from daunting to doable.

Our first goal will be to save an emergency fund of $1,000. Here's how to do it.

You Have More Money Than You Realize

It doesn't always seem like it, but trust us, you do. Do you have a budget? If not, that is the first step to creating an emergency fund. If you don't have a budget, you don't really know how much money you're spending or what you're spending it on.

Our favorite budgeting tool is Mint because it's free and simple to use. If you don't have a Mint account, set one up now. It won't take more than 15 minutes.

Once you have a month's worth of data in Mint (or wherever you're keeping your budget) go over each transaction. Holy cow! You're spending how much on lunches?! And how much on Starbucks and gas station snacks!?

Look for these kinds of things first because they're among the easiest to cut. You know how to do it, we all do. Bring your lunch from home (healthier too), drink the free coffee from your office; carry a reusable bottle of water and a couple of packages of nuts or protein bars with you when you leave the house.

None of these things are hard, we just get into the habit of doing things that are convenient and convenience is expensive.

Another easy way to cut expenses in order to save up an emergency fund is to let Trim do the work for you. Trim is an App that goes through your transactions looking for recurring monthly expenses. Things like your gym, Netflix, Audible, and makeup box subscriptions.

When Trim finds those kinds of expenses, they'll send you a message asking if you want to cancel them. If you do, reply "Yes," and Trim does the rest! And the service is free!

If you're actually going to the gym on a regular basis, we'll let that one slide because exercise is good for you (although you don't have to belong to a gym to work out. I have worked out every day for nearly ten years and I've never belonged to a gym). But if you haven't been in months, the gym expense goes.

Those other things are fun but remember EMERGENCY! You're just going to have to make do without them until you have your emergency fund.

Billshark is another great tool to cut expenses. They will negotiate lower rates on things like cable, cell phone, satellite TV and radio, internet, and home security bills. Billshark charges 40 percent of the amount they save you in one year. You can certainly negotiate lower bills for those services yourself, but it can be frustrating and time consuming. If you're short on time and patience, Billshark can be worth the cost.

Hopefully, these tips will save you at least a few hundred dollars over the course of a couple of months. But we need more. That's next.

You Can Make More

Everyone should have a second (or third or fourth!) source of income apart from their regular job. All of us could use more money, and you never know when you could lose your job, perhaps due to no fault of your own.

And because of the internet and the sharing economy, it's easier than ever to bring in extra money. Drive for Uber or Lyft, rent your home or a room in it a few times a month on Airbnb (crash with a friend), teach English as a second language with QKids, shop for and deliver grocery orders with Instacart, do odd jobs on the weekends with TaskRabbit.

There are literally dozens of ways to make money in your spare time. And just like money, you have more spare time than you realize. Don't believe it?

Actually track the amount of time you spend in just one day watching television, playing around online, and playing video games. You'll be surprised to see just how much time those things take up in your day.

Just spending ten hours a week on any of those things or one weekend a month in the case of Airbnb could bring in a couple of hundred dollars. And now that you're too busy making money to watch television, cut cable. I did that at the end of 2018, and it saves me $80 a month.

Where to Keep It

An emergency fund should be accessible, not under your mattress accessible, but you should be able to get that cash the same day you need it. That means in your savings account. Why not your checking account? Good question!

Because when your emergency money is mingling around with your spending money, it's tempting you like a Siren's call. I'm a personal finance writer, and if I saw those extra zeros in my checking account, I'd be heading out to the nearest mall and making it rain.

Intellectually we all know money in your savings account can be spent just as easily as the money in your checking account, but that separation is psychologically powerful. I swear I have never made it rain with the money in my savings account!

Most brick and mortar banks pay really paltry interest on savings accounts, like less than 1 percent paltry. Check out online banks. Not having the overhead of physical locations means they can offer their customers better interest rates on savings accounts.

What About a Credit Card?

Reaching for a credit card in an emergency situation isn't necessarily forbidden. A credit card can be a great tool in an emergency. Maybe you're not quite living paycheck to paycheck but you don't have a fully realized emergency fund either.

In that case, using a credit card allows you to spread the impact of an emergency. You have the normal grace period and after that, as long as you're paying more than the minimum monthly payment, the consequences aren't catastrophic. Just make it your priority to get the card paid off quickly so you don't incur too much interest.

It's Worth It

We've asked you to make some sacrifices in order to create an emergency fund on a budget, but nothing too drastic. So you bring your lunch to work and spend a couple of weekends a month driving for Uber. Those things aren't too bad.

And the first $1,000 is the toughest. Saving the rest will come easier because you're accustomed to it.

We promise having that emergency fund will make your life less stressful. Always worrying about a disaster you can't afford is one of the most stressful things in life. But having an emergency fund means we can afford the disasters life throws at us from time to time, so it's worth it.