Start and Build Emergency Savings — Even If You Are Broke

Unexpected expenses seem to hit at the worst of times.

An unanticipated negative financial shock, such as a lay-off, or an emergency expense like a home repair can have major financial repercussions for those without savings, regardless of your income level. What happens when the unexpected becomes a reality? Will you be prepared?

If your answer is no, it may be time to review your finances and look for opportunities to save money.

Creating a realistic emergency fund

The golden rule many financial planners follow is to save 3-6 months of living expenses. This rainy-day fund is meant to cover necessities such as housing, food, gas, and health care, but let’s be realistic for a moment.

“For most people, that target is unreachable,” says financial advisor Laurie Itkin. “You want to have at least something in your emergency fund because you don’t want to have to use your credit card and carry a balance you can’t pay off.”

An emergency fund doesn’t have to be huge. Even saving a small amount of money can prevent you from falling into a financial crisis. Families that saved $250 - $749 were less likely to face eviction, miss a rent or utility payment, and less likely receive government benefits after a job loss.

“With even a modest savings buffer, a household is better-positioned to continue meeting financial commitments without taking on debt,” says Sam Bufe, a statistical data analyst at the Social Policy Institute at Washington University in St. Louis.

More savings means less hardship. Low-income families with over $2,000 in savings were considered more financially resilient than middle-income families with no savings.

When to tap your emergency fund

When you’re in an emergency, it’s okay to use your rainy-day fund when you truly need it to help pay for necessities rather than take on extra debt.

“If we avoid drawing down savings when expenses are exceeding income, we may have to take on debt and make interest payments unnecessarily,” Bufe says.

Emergency funds also prevent consumers who don’t have access to low-cost lending from turning to alternative financial services such as payday loans or auto title loans.

“Having a cushion if an unexpected emergency expense arises will keep you from drawing from less desirable options like taking out high-cost debt or short-term revolving debt,” says Cliff Robb, an associate professor of consumer science at the University of Wisconsin-Madison.

If you don’t have an emergency fund and you are forced to turn to these more expensive alternatives, using a credit card is more ideal than taking out one of these loans, says Robb.

Saving for beginners

Saving can be difficult as it’s easier to spend money now instead of waiting to spend it later. For this reason, it may suit you to start saving money passively. Here are a few methods:

Automate it

If you have direct deposit, automatically shift a percentage of your income to a separate bank account instead of putting all of it in your checking account where it’s easily accessible. Designate a percentage of your money every month to go into short-term savings if you don’t have direct deposit.

Start small

Remember: If saving is completely new for you, you don’t have to save a lot of money immediately. Putting aside $15 or $20 a month in an account you don’t use regularly can help fund your emergency savings.

Consider account options

While savings accounts typically don’t have the highest interest rates, high-yield savings accounts can give you a better return to grow your savings.

To make it less tempting to use your savings, open a free savings account at a different bank or credit union than you normally use.

“Since this account is separate from the bank you normally use, it is harder to transfer the money to a checking account that one would use for regular consumption,” Bufe says. “One has to be very intentional and make an extra effort in order to withdraw from this separate savings account.”

Surviving on a tight budget during an emergency

If you’ve lost your income or taken a pay cut, it may be time to proportionately decrease your expenses.

Using a notebook or budgeting app to track your expenses, look for spending patterns to see your full financial picture and find ways cut back. Subscriptions for a gym membership, Hulu, Netflix, and Spotify can be a good place to start tightening your budget.

“We spend money on so many things that can be eliminated or reduced,” Itkin says.

Tracking your wants versus your needs is one way to find places to save.

For a lot of people, it can be challenging to live at a lower income standard than we’re accustomed to. Just like any habit, saving will become second nature with practice.

“When you cut your expenses, it can be hard because it feels like you’re being deprived or punished,” Itkin says.  “Remember, this is just temporary and your spending can go back to normal once your income recovers.”

If you find yourself without enough money during this time, starting a side hustle or part-time job can help you earn extra cash until your full-time job picks up again or you find a new job.

Contact your lenders

If you cut expenses but still don’t think you’ll be able to pay your bills this month, it may be time to reach out to your landlord and creditors to let them know about your situation. They may be able to help you find a solution.

“Most lenders don’t want you to be in default on your debt and most landlords don’t want to remove a tenant,” Robb says.  “A common response to financial emergencies is ignoring them, but you need to be direct and communicate about it.”

Ask for help

Savings can mitigate emergency expenditures, but it may seem like a pipe dream if you’re living paycheck to paycheck.

Thankfully many free financial counseling services exist to help you save and guide you through financial emergencies. Financial coaches can identify the best steps to reach your financial goals and how to prioritize savings and spending.

“A financial coach should be able to look at your overall financial picture and help you develop a plan that is tailored to your circumstances that will allow you to build financial security,” Bufe says.

Get started

You don’t need a lot of money in the bank to be a successful saver. Baby steps are key. By starting small, being reasonable, automating transfers, and eliminating unnecessary expenses, you can be on the path toward saving for your future.

Sam Bufe is a statistical data analyst II at the Social Policy Institute at Washington University in St. Louis, where his research focuses on financial security issues in low- and moderate-income households. In this role, he spends much of his time designing, administering, and analyzing responses to the Household Financial Survey, which is part of the Refund to Savings Initiative. Currently, he is working on papers that investigate the effects of tax-refund savings on participation in the gig economy, the impacts of financial shocks on financial well-being, and the results of an experiment that encouraged low-income tax filers to open and save tax refunds in starter retirement accounts.

Laurie Itkin is a financial advisor, wealth manager, and certified divorce financial analyst. She is also the author of the Amazon best-seller, Every Woman Should Know Her Options: Invest Your Way to Financial Empowerment. Through her financial consulting company, The Options Lady, she provides divorce-related financial planning and analysis to individuals and couples throughout all stages of the divorce process.

Cliff A. Robb is an associate professor of Consumer Science at the University of Wisconsin-Madison. He is the faculty director for the personal finance program in the School of Human Ecology. His research interests include financial decision-making (with an emphasis on the relationship between financial knowledge and observable financial behavior), college student financial behavior, and financial satisfaction and well-being.