Rebuilding your emergency fund

When a natural disaster or global pandemic hits, we are reminded of how unpredictable life can be. If we do not have a financial backup plan to help carry us through, moving forward can be challenging. Even when house or car repairs arise, having an emergency fund to fall back on can make things much easier. So what happens when you’ve tapped into this cash reserve following an event and now you need to rebuild it? Where do you start? Here are some tips for emergency fund planning for this important financial safety net.

What is an emergency fund?

An emergency fund is a cash reserve that is set aside for financial emergencies or unexpected expenses such as house or car repairs, or any other event that requires money, not in your day-to-day budget. Your emergency fund should generally be separate from your savings account since a savings account sets aside money for a particular goal, while the purpose of an emergency fund is to help cover unexpected costs for a short period. How much money to put into an emergency fund depends upon your situation and monthly expenses, but a general rule recommends that a single person should consider having enough money to cover three months of expenses, while a family with dependents should aim for six months.

Starting emergency fund

Returning your emergency fund to its original balance may take some time, so don’t be discouraged. Consider building a baby emergency fund or starter emergency fund. This account contains a smaller amount of money than a full emergency fund and should be based on your expenses, not your monthly income. This type of fallback fund is meant to generally cover one month’s worth of your essential expenses and can offer a great way to start an emergency fund from scratch or build back up a depleted one. Proper budgeting and reduced spending is the ticket to getting this fund going and allows you to start building your balance up.

Establishing an emergency budget

If you exhaust your emergency fund, you may find your spending reflects your current financial state. You can start by building a whole new budget. Similar to building a regular budget, your emergency budget will be based on your income and expenses while cutting out any spending categories that aren't necessary. In other words, you can try and create a much stricter budget that helps keep your expenses down to essentials.

Suspending non-essential money goals

Before the emergency fund was utilized, you may have been tackling debt by paying off credit cards or school loans. In this situation, you could go back to making the minimum payments on what you owe until you have your starter emergency fund back to a comfortable amount.

Eliminating non-essential expenses

To help put extra money toward your emergency fund, you can take stock of subscriptions, streaming memberships, and apps that you can do without. You could also cut back on eating out, unnecessary clothes shopping, entertainment, or travel plans for a while.

Cutting automotive costs

The average person spends thousands of dollars in transportation costs. Selling your vehicle may be an option and then using alternate transportation that could help cut your household expenses by removing costs associated with owning a vehicle.

Reducing the utility bill

Cutting back on electricity and home heating and cooling bills can make a big impact when trying to save money and rebuild your emergency fund. To help lower the utility bills you could:

• Use less air conditioning
• Install energy-efficient lightbulbs
• Only run the dishwasher with a full load
• Hang dry laundry instead of running the dryer
• Adjust the thermostat up or down a couple of degrees
• Keep curtains closed during hotter days
• Turn the computer off when not in use

Lowering the grocery bill

Your monthly food bill is typically one of the largest household expenses. To help save money while rebuilding an emergency fund, you could consider using coupons, only buying what is needed, planning meals for the week, and making extra portions to provide leftovers for lunch.

Keeping track of spending

Tracking income and expenses can be a crucial part of making an emergency budget work and can be especially important when you’re in emergency mode. To help monitor your spending you could:

• Check your credit card balance regularly to help avoid overspending.
• Save your receipts and keep a running tally of what you’ve bought.
• Download a free finance app to help make tracking accounts easier.

Supplementing your income

To help rebuild an emergency fund faster, or to increase the amount you’re saving each month, there are a variety of ways to help supplement income. You could take on a part-time job. You could pick up delivery jobs, drive passengers, sell items around the house you no longer need, tutor students, babysit, pet sit, or rent a room if you have the space.

Devise a backup plan

Life’s twists and turns can often be worrisome, so having a dedicated emergency fund can help ease those worries. You could consider creating a backup plan, devising a short-term strategy that includes where you could find possible employment, take out a loan, or get help from family or friends if the expense(s) were more than what the emergency fund could provide. You may experience one or more difficult times in your life, so being financially prepared can help bring a little peace of mind to an unpredictable future. Consider taking time to maintain and reassess your budget regularly and prioritize your spending when possible. If you can, you could set aside a certain amount of your paycheck each month to automatically deposit in your emergency fund. By doing so, you can begin to rebuild your emergency reserve if the need arises in the future.

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REV 10/2022