Building an emergency fund on a low income can be difficult, but its not impossible. Not only is it a possibility, but its an absolute necessity – especially on a low income. I’m going to give you 7 actionable steps, along with some tips and resources to help make the process of starting your emergency savings a lot less daunting, even if you feel like you’re barely making ends meet.
As you read ahead, keep this thought in mind to give you a little extra motivation:
If you want something you’ve never had, you must be willing to do something you’ve never done. And with that, let’s get into it!
#1 – OPEN A SAVINGS ACCOUNT
If you’re going to have a savings, you need to put it somewhere that makes sense and I mean actual cents. You want your money to work for you a little bit instead of you just working for your money. The first thing you want to do – if you haven’t done it yet – is to open a no-fee, high yield savings account. Now, most brick and mortar banks – or banks with physical branch locations in your area – offer on average a 0.45% Annual percentage yield. Which means, the bank is going to calculate less than a half of a percent of what you have in the bank and then add that amount to your bank account each month. Here’s an example: Let’s say you open a savings account with a deposit of $25 then
put $25 in your account every month for 12 months, you would have saved $325 but the interest earned on that would only be about $.73 over the course of 1 year. Then on top of that, many banks charge a monthly fee of $5-$10. So that $325.73 that you thought you were going to have, ends up being only about $265 because they took $60 out in fees. The point is to save money, not lose it! For that kind of savings, you may as well just keep your money under your mattress. However, online savings accounts tend to have higher APYs between 4 and 5%. If you’re like I was, you may be reluctant to have an online only savings account. But accounts like the Capital One 360 savings account – and this is not sponsored, I get no commission, I just really like the product – offers a 4.3% APY, has no minimum balance requirement and no monthly fees. You don’t even need any money to open the account. So on that same $25 per month plan, you could earn almost $7 in interest giving you about $332 and you get to keep it all. And $7 might not sound like a lot but when there’s more money in the account than what you put in there, that’s always a good thing.
#2 – CREATE A SAVINGS PLAN
The second step is to create a plan for putting money away. One great way to start is with the 52-week money challenge. This is a fun, straightforward and simple method to build your savings over the course of a year. The principle behind it is this: On the first week of the challenge, you save $1. If you have that in cash you can just drop that into an emergency fund jar until you reach an amount that you want to
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deposit into your bank account. The following week, you save $2. The week after that, $3, and so on. Each week, you incrementally increase the amount you’re saving by just $1. Now, you might be thinking that it doesn’t sound like much. But when you do the math, by the end of the year, if you stick to the plan, the amount you’re saving every week will have gradually increased to $52 and all together you would have saved $1,378. Which, if you currently have nothing saved, is a really great start. What I also like about the 52-week challenge is that it gives you a little time to work on increasing your income if necessary. And as you increase your income a little, you increase your savings a little. But we’ll talk more about that later in the video. Alternatively, you can begin your savings plan by deciding on a specific amount that you want to have saved up in a year, divide that by 12, giving you a set savings goal for every month. Its recommended that you save up at least 3 months worth of expenses for your emergency fund. I know that sounds like a lot! But before you get too concerned about whether you can afford that savings goal, lets go to step 3, which is:
#3 – REDUCE YOUR EXPENSES
Trust me, you have money to save. Sometimes you just have to dig a little to uncover it. If you haven’t done so already, track your expenses for the next 30-days or just look back through your bank account and see what you’ve been spending your money on and see what things you can cut from your ongoing expenses. You can get rid of some non-essential recurring purchases like one of your streaming services. Another way to reduce your expenses is to look into Public assistance programs to see if you qualify for government assistance that can help lower or cover some of your essential expenses. In Pennsylvania for instance, a family of 4 with an annual income of up to $64,000 can qualify for programs like SNAP or the FREE/Reduced School Meals program which can help stretch your grocery budget significantly. This could give you the opportunity to bank a lot of what you would normally have had to spend on food. You can also apply for free or low cost healthcare coverage for you and your children, get energy assistance through LIHEAP which can sometimes cover a whole month of electricity or gas expenses when energy costs tend to be their highest. You can even get a free smart phone and cell phone plan if you qualify. You can learn more about and apply for these and other government assistance programs for your area at usa.gov/benefits.
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#4 – USE A SWAP LIST
As you go through the process of looking for ways to reduce your expenses, you can use what I call a swap List. This is where you write down your regular expenses in the first column then research and write down some lower cost alternatives in the second column. One by one, you can start to switch over to the cheaper options, calculate the total cost savings and transfer that amount into your emergency savings account each month.
#5 – INCREASE INCOME
Now, after going through and reducing your expenses, if you’re still not able to see how you can put aside your goal amount each month, you can explore simple and flexible ways to increase your income that don’t require taking on a second job. First, you can declutter your home and sell items you no longer need and add the money made to your emergency fund. Check out this video clip to help you know what steps to take to start selling your no-longer used items. You can also start a flexible side hustle or some freelance work to help supplement your income. And if you need some ideas, I have another video here where I show you 6 different ways that my husband and I have generated extra income over the years.
#6 – AUTOMATE SAVINGS
Now, once you’ve identified what money you’re going to use to build your emergency fund, you’ll want to Automate your savings process. If you tend to be forgetful or even nervous when it comes to saving, automation is a great idea for you. It’s like a personal assistant but for your savings account. Most banks offer the ability to set up automated transfers from your checking account into your savings account. You can set a standard weekly, biweekly or monthly amount and as long as there’s money in your checking account, the transfer will go through. And if you aren’t completely comfortable with having online-only accounts, you can still keep a brick and mortar checking account but then have the higher yield savings account that is online-only and then transfer money from your checking account into your savings account. You can just set it up once and basically forget about it. You can start with a small amount each week that you’ll hardly even notice is gone. Or you can set the amount higher just as long as its an amount know you can afford to have leaving your checking account on the schedule you set. And then be sure to include this savings amount in your monthly budget.
#7 – SET RULES
Then this last step is to help ensure that the money you’re putting away is still in the bank when you actually need it for an emergency and that’s to set rules for the use of the savings. One of the things that keeps people from building a good emergency fund is that they keep dipping into it for things that don’t really qualify as a true emergency. I mean, finally spotting that pair of cocoa brown high quality leather riding boots that you have been searching for for the last two winters and now you finally found them – IN YOUR SIZE – and for 30% off might be extraordinarily exciting news but I don’t know if it constitutes an emergency. However, you will need to define that for yourself upfront and then stick to that definition. Don’t wait until something comes up to start trying to figure it out. Think about the things that have a cost associated with them that could possibly go wrong and have a negative domino effect on other areas of your life. For instance, a partial or complete loss of income will affect other areas of your life because you need money to buy food, or pay for heat and electricity, etc. In a case like that, you would absolutely need those emergency funds which is why its often recommended that you work towards building a savings of at least 3 months’ worth of living expenses. Other types of emergencies may include medical bills if you don’t have sufficient medical insurance in the event of an illness or if your vehicle is essential for you getting back and forth to work and you don’t have public transportation options, and you’re unable to move things around in your regular budget to cover it, then major car repair or replacement could be considered an emergency for you. Whatever you decide, write those things down and then before you actually use those emergency funds, ask yourself 3 questions:
- Is this situation unexpected?
- Is it absolutely necessary?
- Is it urgent? – as in you don’t have any time to save up for the expense.
If you answer yes to all three, then its likely you need to use those emergency funds. And that’s okay because that’s what you would have been saving it up for!
Whatever goals you set and whatever plan you put in place to reach them, just do your best to stick to them, if you need to, ask someone you trust to help keep you accountable and remember that every little bit counts and it’s never too late to start saving. Embrace the challenge and make the most of what you have!
