How to Build an Emergency Savings Fund (On a Budget)

For many working Americans, the thought of an emergency savings fund is a far-off concept. In fact, the latest statistics show that more than half of hourly workers do not have a savings fund. When you’re living paycheck to paycheck, your first priority is just covering your bills—not necessarily storing away money for a rainy day. So we're not here to give you a lecture on savings (surprise!). Instead, let's look at some things you can do to set yourself up to save. By tackling some of these tasks now, you'll be in a better position to start that rainy day fund.

1. Create a debt payoff strategy

This may go against some advice you’ve heard in the past, but before you can accumulate savings, it pays to get rid of any high-interest credit card debt. The longer it takes you to pay off your credit cards, the more interest you pay. Say, for example, you have a $3,000 balance on a credit card. If the card charges 15% interest and you make a minimum payment of $100 a month, you’ll still spend close to $1,000 on just interest alone, which doesn’t even touch your actual balance. That’s $1,000 that could be going towards your savings fund instead of the credit card companies.

So, let’s help you get rid of that pesky debt as soon as possible. Here are some tips to pay down debt faster:

Use the snowball method

If you have multiple credit cards, one strategy is to go from smallest to largest balances, paying off the credit card with the smallest balance first. This is called the snowball method. Some experts believe starting smaller can help you build up the momentum to keep going as you tackle the bigger balance afterwards.

Go beyond minimum payments

Calculate how much you can afford to pay over the monthly payment. The minimum payment amount usually factors in a payment plan of roughly 3 years. That’s 3 years worth of interest! Aim to make your monthly payment more than the minimum amount dictated by the credit card company. Even if it’s $25 dollars more, that’s going to help you pay off your credit card faster than if you just made the minimum payments alone. 

Explore balance transfers

Escaping the trap of high interest is crucial. See if there’s another credit card you can transfer your balance to. Many have introductory rates of 0% interest for the first year, giving you time to pay off your balance before that high interest kicks in.

Avoid taking on more debt

In the meantime, try to avoid taking on more debt. Resist the urge to open up new cards or take on predatory payday loans. Always read the fine print and take note of the interest rates for any offers.

2. Prevent overdrafts

Which leads us to our next point. Avoiding overdraft fees from your debit card or bank account is crucial to getting your feet above water enough to save away for a rainy day. Banks can be sneaky with their overdraft fees. Forgot to cancel that subscription service? Paid an extra expense this month that doesn’t normally factor into your budget? Unexpected bills or expenses can cause you to overdraft, and usually overdrafts come with some hefty fees. What’s worse, if you don’t notice that you overdrafted right away, you may incur additional fees for being late to make a payment. Being just a few dollars in the red in your account can quickly add up to expensive overdraft fees that truly add up. 

And sadly, most banks charge overdraft fees. In fact, last year they charged more than $11 billion dollars worth. (That's one of the reasons we're so passionate about NOT having overdraft fees or fees of any kind, thank you very much.)

In 2019, large banks charged more than $11 billion dollars in overdraft fees

One way to avoid this is to have a clear look into your budget at all times. If you don't already have a budget, now's the perfect time to start. Tally up your monthly expenses—that includes all bills, rent payments, groceries, gas, etc.—and all sources of income. Your budget is bound to fluctuate from time to time, so if you haven't done this exercise in a while, take some time to do it today.

And if you want any help creating a budget, Branch can do it for you. Our Auto-Budget feature gives you an overview of expenses and payments, and also alerts you to upcoming bills. This helps you better track your expenses and avoid those dreaded overdraft bills for good.

3. Examine your priorities

So, you've paid down your debt and created a budget. First of all: Congrats! Tackling those two huge steps is a major accomplishment, and one that should be celebrated. Now, it's time to start saving. Based on your budget, look at the amount of money you have leftover each paycheck after you've paid all your bills, purchased your groceries, and paid for your other typical expenses. The amount leftover is referred to as your discretionary or "disposable" income. But it's not going to get thrown away: We're going to put it to good use.

Within your disposable income, there will naturally be things you want to buy that bring you joy. Take a look at your spending habits and see what items you value over others. If treating yourself to a coffee shop drink is something you value, that's a choice you can make! Build that into your budget. In order to start saving though, your coffee shop treat may mean that eating lunch out on those days is out of the question. Or that those Target runs that end up being more than you bargained for need to come to an end. Everyone's values are different, and you get to choose what you enjoy spending money on the most.

4. Determine how much you can comfortably contribute

Once you account for some of life's simple pleasures, look at how much you can comfortably contribute each paycheck. The key word here is comfortably. You don't want to stretch yourself so thin each paycheck that you end up putting purchases on a credit card and starting the cycle of debt all over again, or taking out a high-interest loan that comes back to bite you.

Here are some tips that can help:
  • Start small if you have to. Even beginning with $25 dollars a paycheck, you'll gain momentum and slowly build a savings fund. Slow and steady is a better strategy than a too-ambitious one that requires you to take on more debt.
  • Make it a no-brainer. If you can set up a recurring transfer into a savings account, do it! That way, you won't even have the option to skip your savings goal each paycheck, because it will already be taken care of.
  • Explore your company's options. Look into any employer matches if your company offers a 401(k) program. Yes, long-term financial saving can seem like a far-off goal, but if your company offers to match contributions that you add to your 401(k), even contributing a small amount to that in addition to your emergency fund can help you feel even more prepared for the future.

It can be overwhelming to hear that you need to save "x amount" of dollars by a certain age, or put away a certain percentage of each paycheck for the future. The truth is, no two people have  the same financial situation, so you need to do what’s best for you. That boils down to saving as much as you can while still being able to pay your bills. Start slow and start small if you have to—the important thing is that you just keep going.

Read next: Why You Should Switch to Apple Pay

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