5 ways to build or re-build your emergency fund

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An emergency fund.

Everyone should have one. Financial experts recommend that an emergency fund should cover at least three months of your normal expenses, though six months or more is ideal. In today’s economy when the majority of Americans are living paycheck-to-paycheck and strapped with debt (student loans, car loans, mortgages, credit card debt, etc.), building an emergency fund takes time and self-discipline. It isn’t easy and sometimes takes sacrifice.

Once you do have an emergency fund in place — no matter how big or small — there is a sense of accomplishment and rightly so!

Using your emergency fund

But what happens if you need to use the emergency fund? Let’s say you have emergency expenses: something major breaks in your house and needs fixed or replaced immediately, your car has an unexpected breakdown and it costs more than you anticipated, there was a medical emergency and your out-of-pocket deductible is high…

Emergency funds exist for this exact reason!

When something completely unexpected happens — something you cannot carefully plan and budget for — you have the money to cover the costs without having to rely on a credit card or accruing debt (or more debt, if you already have some).

I know it can seem like a setback when you view your savings account after such a situation and see that a significant portion of the carefully built emergency fund is gone. Depending upon how much was used and how much is left, it may even feel like you are starting back at square one.

Remind yourself: You had the money to cover your emergency out-right and that is a huge success! Wonderful job!

Now begins the journey of re-building your savings. Yes, it may be slow but you did it before and you can do it again.

Rebuilding your savings

I understand this struggle firsthand. We started last year with a great emergency fund and savings built up over four years. Then we had a series of planned and unplanned expenses: unpaid maternity leave, rent and bill increases, assisting with my mom’s cancer treatments, moving, both cars breaking down at the same time, a penalty fee for not renewing our car registration on time, paying off our only loan (a car loan) in one final lump sum to save on interest, etc.

By the end of the year, our savings had been drained to almost nothing. I admit that I was feeling quite overwhelmed and discouraged… until I reminded myself that even though it seemed like we “lost” so much money in a single year, we had been able to cover both the planned expenses and the unplanned emergencies without using a credit card or taking out a personal loan.

In the end, having paid off the car loan a few months early, we were also completely debt-free! This is a big win for us. Our attitude and how we choose to look at a situation is very important.

Now we are in the process of re-building our emergency fund and savings. If you find yourself in a similar situation, here are 5 ways you can re-build your savings after an emergency.

1. Put a specific amount of money into your emergency fund (savings) each paycheck.

This does not have to be a large amount, but it should be the same each paycheck. Every paycheck diligently set aside your chosen amount for your emergency fund. It can be $10 or $25 or $50 or $100 or more… whatever you can afford.

This is your minimum savings per paycheck. No matter what, this is what needs to go into your emergency fund.

Differentiating your savings

You might be thinking: Wait a minute. If all of my savings are lumped together in one savings account, how do I know what is the emergency fund and is for something else? Is all my savings account the emergency fund? Should I open a new separate account?

You decide how you want to do it. Some people view their entire savings account as their emergency fund; others do prefer to open a separate savings account just for emergencies. Me? I like to keep things simple: I have a spreadsheet for our savings account in which I track the total amount, deposits/withdraws, and earnings via dividends. I also have a section where I have created “funds”, including the emergency fund. Then I divide the total amount in our savings into these different “funds” so I can keep track of our savings.

Learn more in my Budget Guide: Organize Your Savings! post.

2. Set up a direct deposit into your savings account.

The easiest way to ensure that you don’t spend money intended for your emergency is to take it out of your checking account immediately after you receive your paycheck. Do it first, not last!

Already have your paychecks direct deposited? Work with your HR to send a small amount of each paycheck ($25 or $50) directly into your savings account. If you cannot do that, many banks allow you to set up an automatic transfer between your checking and savings accounts. You can transfer the money earmarked for your emergency fund right away.

Depositing your paycheck in person? Have the bank teller transfer your emergency fund money into your savings account right away. If you are cashing your paycheck, either deposit your emergency fund money into the bank as soon as you can or set it aside in an envelope in a lockbox so it is not conveniently accessible and you won’t be tempted to add it to your spending cash.

Move your chosen amount into your savings account immediately after you get your paycheck to build your emergency fund. Do it first, not last! Click To Tweet

3. Save the money leftover after paying all of your bills, loans, living expenses, etc.

A day or two before your next paycheck, verify how much money you have leftover after all of your bills, loans, and living expenses were paid. If you have some extra money… $10, $20, $50, etc. …that you can set aside, don’t spend it! Transfer it over to your savings for your emergency fund. These little extras on top of your minimum savings per paycheck can help you re-build faster.

Note: most checking accounts require a minimum balance to remain in the account at all times. With my bank, it is $5.

Create your own “zero” balance

Many years ago when I was first starting out on my own, my mother gave me excellent advice. Choose an amount and make this your pretend “zero” balance. It can be $100 or $250, whatever you decide. This is your new “zero” balance and never dip below it. This ensures that you will never overdraw when paying bills or bounce any checks you may write. (Yes, some of us still have to write checks.)

So let’s say you decide that $100 is your “zero” balance. The day before your next paycheck arrives, your checking account has $121 in it. You can transfer the “extra” $21 to your savings for your emergency fund without dipping below your “zero” balance… and you still have that cushion of $100 in your checking.

Learn more about creating a safety net in my Budget Guide: Organize Your Savings! post.

4. Cut expenses and spending where you can.

Evaluate your bills, routine expenses, and spending habits to see if there is an area where you can lower costs. Here are some ideas that could work for you:

• Call your cable/internet provider or your cellphone service provider to see if you can lower your monthly bill. A $5 or $10 savings a month adds up.
• Is there a monthly subscription service you no longer use or could go without for a while? Cancel it and save that money.
• Find a gas station with lower costs and put the extra money into your emergency fund.
• Swap one regular grocery store trip a month with a visit to a discount grocer.
• Do you go out to eat once a week? Regularly buy coffee or tea at your favorite shop? Visit the vending machine at work more than you’d like to admit? Skip one dining out meal or one coffee/tea run. Pack snacks instead of paying extra at vending machines. You could save anywhere between $5 and $25 in one go!
• In need of a new clothing item? Kids need new shoes? Check out the secondhand shops first. Many have discounts based on the day-of-the-week and their color-coded tags. 50% off yellow tagged items on Wednesday? Time for the yellow-tag scavenger hunt!

Cutting expenses and spending will look different for everyone depending upon your unique situation and the cost of living in your area. Be creative, be honest, and be patient. Do not get discouraged if you have already cut your expenses and cannot find any other place to cut. You are doing great! A penny saved is a penny saved, and pennies do add up… eventually.

Learn more in my Budget Guide: Evaluating Housing, Bills, and Expenses post.

5. Earn a little extra on the side.

If your schedule allows it, brainstorm a way you can add in a little side-hustle. This will help earn a little extra. Maybe it is putting in a few hours of overtime. Or it could be babysitting a friend’s kids one evening, walking a neighbor’s dog, tutoring middle school kids, giving music lessons, baking and selling treats, designing custom t-shirts to sell online, managing social media for a local business, copy editing, offering website updates and/or maintenance, etc.

Figure out what skills you have to offer those around you. See if you might be able to bring in extra money each month that can go to your emergency fund. Twenty or sixty extra dollars may not seem like a lot to some people out there, but it could be huge savings for you. The key to making this type of a side hustle a success is that it needs to have little or no start-up and maintenance costs. Save as much of the extra money as possible. Side hustles also need to fit in your current schedule without causing you undue stress or having a negative impact on your family.

To wrap up

It may at first seem like you are pinching pennies, but $5 here and $5 there adds up to $10 and that is $10 more in your emergency fund than you had before. Add that to your minimum savings per paycheck and any money leftover after all your expenses and spending, and you just might be surprised how much you put away in a single month.

Remember that the goal is to have enough money in your savings so that you can cover out-right any unexpected emergencies without relying on credit cards, loans, or any other form of debt.

So you had an emergency — or two or three — and are having to rebuild your savings again. Don’t be discouraged! Using your emergency fund was not a failure but a success!

Piece by piece, paycheck by paycheck, month by month, you are rebuilding your emergency fund.