Plan for Tomorrow | Rebuilding your emergency fund
A young woman works through her emergency fund on paper and a tablet

Rebuilding your emergency fund

Apr 30, 2024, 1:58:17 PM | Reading Time: 5 minutes

When an unexpected event or emergency happens, we are sometimes reminded of how unpredictable life can be, and without 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 reestablishing this important financial safety net.

What is an emergency fund?What is an emergency fund?

An emergency fund is a cash reserve that can be set aside for financial emergencies or unexpected expenses such as medical bills, house or car repairs, or any other event that requires money that’s not in a day-to-day budget. An emergency fund should generally be separate from a savings account since a savings account generally sets aside money for a particular goal, while the purpose of an emergency fund is to help cover unexpected costs for a short period.

What amount should be in an emergency fund?

Deciding on how much money should be 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 or more.

Starting an emergency fundStarting an emergency fund

Returning an emergency fund to its original balance may take some time, so it’s important not to get discouraged. Consider building a small emergency fund or starter emergency fund that is generally meant to cover one month’s worth of essential expenses. This account contains a smaller amount of money than a full emergency fund and is typically based on expenses, not monthly income. This type of fallback fund can be a great way to start an emergency fund or rebuild a depleted one. Following a budget and reducing spending can help get this fund rolling and build the balance up.

Establishing an emergency budget Establishing an emergency budget

If an emergency fund is exhausted, spending habits should be revised to reflect your current financial state. It may make sense to build a whole new budget. Similar to building a regular budget, an emergency budget should be based on income and expenses while cutting out any spending categories that aren't necessary. In other words, creating a much stricter budget can help keep 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, it may make sense to pay the minimum amounts on what is owed until the starter emergency fund has returned to a comfortable balance.

Eliminating non-essential expenses

To free up extra money to put toward an emergency fund, take stock of subscriptions, streaming memberships, and apps that you can do without. Cutting back on travel costs, dining out, unnecessary online shopping and entertainment can also provide more income to put toward the emergency reserve.

Cutting automotive costs

Transportation is often a large part of a household budget. The average person spends over $800 per month on transportation costs. If it’s possible, selling a vehicle and using alternate transportation could help cut 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 may consider:

  •  Use less air conditioning
  •  Install energy-efficient lightbulbs
  •  Only run the dishwasher with a full load
  •  Hang laundry to dry 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

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, sticking to a list, planning meals for the week, and making extra portions to provide leftovers for lunch.

Keeping track of spendingKeeping track of spending

Tracking income and expenses can be a crucial part of making an emergency budget work and can be especially important when in emergency mode. Tips to help monitor spending include:

  •  Reviewing credit card balance regularly to help avoid overspending
  •  Saving receipts and keeping a running tally of what is bought
  •  Downloading a free finance app to help make tracking accounts easier
  •  Finding ways to supplement income

Earn extra incomeEarn extra income

To help quickly build up an emergency fund, or to increase the amount that is saved each month, there are a variety of ways to supplement income. Taking on a part-time job, even temporarily, can replenish an emergency reserve much faster. Possible options include a delivery job, driving passengers, selling household items, tutoring students, babysitting, pet sitting, or dog walking.

Devise a backup planDevise a backup plan

Life’s twists and turns can often be worrisome, so having a dedicated emergency fund can help ease those worries. Creating a backup plan can be a valuable exercise that outlines possible employment options and lists family or friends to call upon for a loan if expenses were more than what an emergency fund could provide.

We may experience one or more difficult times in our lives, so being financially prepared can help bring a little peace of mind to an unpredictable future. Taking time to regularly review a budget and prioritize spending can help keep this financial goal on track. Automatically setting aside a portion of your paycheck each month to deposit into a designated account is a convenient option and brings an automated approach to saving for emergencies. By being proactive and more mindful of your finances, you can begin to rebuild your emergency reserve and create greater financial security for the future.