HOW TO BUILD AN EMERGENCY FUND ON A TIGHT BUDGET

If you want to build an emergency fund on a tight budget, start smaller than you think you should. Your first goal does not need to be three months of expenses. It can be $500, saved a few dollars at a time.

I remember crying over a $20 overdraft fee because it meant I could not buy milk. When you have no cushion at all, every small surprise turns into a crisis. An emergency fund is what keeps a flat tire from becoming a late payment, a fee and a new balance on a credit card.

WHY IS $500 A GOOD FIRST GOAL?

A few hundred dollars covers a lot of the surprises that knock families off track: a car that needs fixing, a copay, a utility bill that came in higher than usual. It is also a number you can reach. In Welfare to Wealthy I shared one of the messages I get from clients:

““We finally have 500 dollars in an emergency fund; I have never seen that in my account before.””

That first $500 changes how you feel about money. You stop holding your breath every time the phone rings.

HOW FAST DO SMALL AMOUNTS ADD UP?

Here is what a steady weekly amount does over time:

1. 1

   $5 a week reaches $500 in 100 weeks, and saves $260 in a year.

2. 2

   $10 a week reaches $500 in 50 weeks, and saves $520 in a year.

3. 3

   $20 a week reaches $500 in 25 weeks, and saves $1,040 in a year.

4. 4

   $25 a week reaches $500 in 20 weeks, and saves $1,300 in a year.

Pick the amount you can keep doing on your hardest week. Consistency matters more than size. As I wrote in the book, aim for unglamorous consistency.

WHERE CAN YOU FIND THE MONEY?

1. 1

   Set up an automatic transfer on payday, so the money moves before you can spend it.

2. 2

   Save the windfalls. Put part of a tax refund, a work bonus or birthday money straight into the fund.

3. 3

   Cancel one thing you do not use. An unused subscription can fund your weekly amount by itself.

4. 4

   Round up. Some banks let you round each purchase up to the next dollar and move the change to savings.

WHERE SHOULD YOU KEEP IT?

Keep your emergency fund in a savings account separate from your everyday checking, at a bank or credit union. You want it easy to reach when something happens, but not so easy that it gets spent on a regular Tuesday. Many people like using a different bank for this, so the balance is out of sight.

WHAT COUNTS AS AN EMERGENCY?

Decide this ahead of time, while you are calm. Fixing the car you need to get to work counts. A medical bill counts. A sale on something you want does not. If you use the fund, that is what it is for. Start rebuilding it with your next paycheck, and do not beat yourself up.

SHOULD YOU SAVE OR PAY DOWN DEBT FIRST?

Many people ask whether to save or pay down debt first. A small starter fund usually comes first, because without it the next surprise lands right back on a credit card. Once you have it, you can send more toward your balances. I compared two payoff methods in Debt Snowball or Debt Avalanche, and if you are carrying several high rate balances, you can book a session with me to look at whether combining them makes sense. Key 2 Debt Free is not a lender, and a licensed lender makes every approval decision.

The plain steps I followed from getting by to getting free are in The Key, and the story of where I started is in Welfare to Wealthy. If you want to talk about your own next step, you can reach me here.

Rachael J Katz is a financial educator, author and speaker. This article is general education, not personal financial advice. Quoted passages are from Welfare to Wealthy by Rachael J Katz.