This is a collaborative post with financial tips on building an emergency fund.
You have probably heard that everybody should have an emergency savings fund that can cover at least six months’ worth of expenses. This is very good advice that everybody should take to heart. Unfortunately, only 23% of Americans have this amount in their savings accounts.
You are going to have an even harder time building an emergency fund if you have a low income. Fortunately, it is still possible if you take the right steps.
A couple of months ago, Clint Proctor wrote an article for Business Insider. He said that he had a ministry job that only paid $2,000 a month. Nevertheless, Mr. Proctor and his wife were able to save a three-month emergency fund in just 12 months.
Here are some tips to build a rainy day fund more quickly.
Emergency Fund Tips
Put it in a separate account
There are two major mistakes that people make when they are trying to build an emergency fund:
- They put the money in your standard bank account. The problem with this option is that you are counting on having enough discipline not to exceed certain monthly expenditures. It is far too easy to blur the line between money that should be saved for emergencies and funds that are available for discretionary purposes.
- They put the money in the stock market or other volatile investments. Their reasoning is that they can grow their emergency fund more quickly in a higher earning account. The problem is that the value of their portfolio can drop significantly in a short period of time. The portfolio will recover in the long term, but that won’t do you much good if you need money for an emergency within the next week.
What is the best alternative? You should set up a separate savings account for emergencies. Make sure that this savings account is connected to your other checking accounts. This way you can quickly move money to your checking account, so you can make a payment in the event of an emergency.
Save your tax refund
If you have a low-income job, then you might qualify for the Earned Income Tax Credit. This means that you can earn a decent tax return, even if you didn’t pay much in taxes over the course of the year. The IRS reports that the average EEITC is $2476.
In addition to the EITC, you will probably get some more money back for having overpaid taxes throughout the year. This is common with people working lower-wage jobs. In general, you can expect to earn around $3000 or so when you get your tax refund.
Most people spend their tax refund on unnecessary expenditures. You should consider putting it in your emergency fund instead. You’ll be surprised by how far it will bring you to your emergency fund goals. As long as you don’t have an emergency this year, you can plan on spending next year’s refund.
Take a hard look at unnecessary expenditures
Regardless of income, anybody can easily run into financial problems. These problems usually stem from them making unnecessary purchases.
You should go through your finances with a fine-tooth comb. You’ll probably notice some recurring expenses that you can do without. These include the following:
- Video streaming services
- Insurance for your pets, contact lenses and other unnecessary coverage
- Memberships to high priced gyms
- Cigarettes, alcohol and lottery tickets
- Numerous features on cell phone plans
- Gifts that are outside your budget
You can go a long way towards saving for an emergency fund if you trim these expenses.
Use credit cards to your advantage instead of your detriment
The vast majority of people have a very polarized view of credit cards. Many spend frivolously and rack up lots of debt. Others are terrified of death and avoid them altogether.
Neither of these approaches is ideal. You should spend some money using your credit cards because you can earn rewards that will save you down the road. However, it is important to pay them off quickly. You will avoid racking up debt and cut your expenses considerably.