How to build back your emergency fund in a tight budget

Emergency funds are  important should you be faced with an unforeseen setback like a sudden job loss, an unexpected car repair or a serious medical situation.

If you tapped into or depleted your emergency savings during the pandemic, it’s vital to set a financial goal to rebuild an emergency fund. Experts suggest having enough money for six months of living expenses in an emergency fund.

Even if your budget is tight, there are ways to stash some cash each month toward emergency savings.

"It may seem difficult to set aside savings when you are on a tight budget, but you have to think about it as having no other choice," said Dawit Kebede, a senior economist for the Credit Union National Association, which advocates on behalf of America’s credit unions.

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Why is an emergency fund so important to have?

Your emergency fund allows you to pay for unexpected expenses, like providing a cushion if you lose your job or face sudden financial obligations. If you don’t have savings, you may have to rely on credit cards.

"Most people rely on high-interest rate credit cards to pay for unforeseen expenses, which leaves them in debt," said Kebede. "Creating an emergency fund avoids relying on debt to absorb a financial shock."

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Pay yourself first

Kebede noted that people tend to put saving at the bottom of their priorities when they have fewer resources. So make building an emergency fund a priority.

"Understand that savings cannot be the lowest priority on your budget," Kebede said. "You have to pay yourself first, even if it’s $15 a month. Setting goals and setting aside something, however small it may be, will go a long way. It will accumulate over time." 

Set a reasonable monthly goal, even when there’s little wiggle room.

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Commit to putting bonus cash in your savings

If you get any extra money during the month, even if it’s a small amount, earmark it for your emergency fund.

"When building out your emergency fund for the first time or rebuilding following a major emergency expense, it’s okay to start with small contributions, and any tax refunds, gifts or extra cash are all great ways to contribute," said Ryan Ball, vice president of market experience at Capital One. "Having a small amount in your account is more helpful than nothing at all in the preparedness for an emergency."

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Set up a save schedule

If you get paid twice a month, for example, create a plan to take a set amount and transfer it directly to your emergency savings account. Even if your budget is tight, pick a small amount and devote it to savings.

"When contributing to your emergency fund, the best practice is to contribute to your account regularly and setting a schedule can help," advised Ball.  

To force savings, Greg McBride, chief financial analyst at Bankrate.com, advised automating your savings with a direct deposit from your paycheck into a dedicated savings account.

"The savings happens first without having to think about it," McBride said.

Another option, McBride explained, especially for the self-employed, is to set up an automatic transfer from your checking account to a savings account at a regular interval, such as once per month or every two weeks.

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How can you force yourself to save without it seeming like a punishment?

First, accept the mindset that savings should be viewed as deferred spending for important or unexpected items rather than a punishment, said Kebede. Next, take an inventory of your spending habits. Can you cancel monthly subscriptions you’re not using? Can you reduce takeout meals or the amount you’re spending on extras like dining out or paying for coffee every morning? Can you carpool to save on gas or stick to your grocery list by meal planning in advance?

"Setting aside a small amount regularly helps you feel that you haven’t sacrificed a lot, and watching your savings slowly accumulate will also provide motivation for you to continue," Kebede said.

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Use your banking institution’s resources

Your bank may have resources available to assist you to promote financial wellness and education. 

For example, Ball noted that Capital One has resources, including its complimentary Money & Life Program, that helps participants build a plan to achieve their goals in life and think through how their financial behaviors connect to those goals.

"In addition to Money & Life mentoring sessions with a professional mentor, we offer a self-guided Money & Life exercise, ‘Map Your Spend,’ that can help participants visualize their spending and figure out where they can make changes to put a little extra money per month away for an emergency fund," he said.

Contact your bank or visit a retail location to inquire about what mentoring services may be available.