If you’re a low-income earner, building an emergency fund can feel daunting. However, building an emergency fund is possible with time, consistency, and the right strategies. An emergency fund consists of 3–6 months of expenses to help cover emergencies like job loss, a health crisis, or emergency home repair. Building an emergency fund is so important because that’s your last line of defense against significant debt and financial stress.
Here are 14 strategies to help you meet your savings goals, even if you earn a low income:
1. Assess your budget— or create one if you don’t already have one.
In order to start building your emergency fund, you first need to know how much money you can contribute to it on a regular basis. Start by writing down how much you make each month after taxes and deductions for health insurance. Then write down your necessary expenses—these are all of the expenses that you need to survive each month:
- Groceries
- Your rent or mortgage payment
- Transportation costs
- Utilities
- Childcare
- Healthcare costs
- Toiletries
- Debt payments
Now that you know how much you’re making and how much you need to spend each month, subtract your necessary expenses from your income to get the maximum amount that you could afford to put toward your emergency fund each month.
Navigating saving vs. paying off credit card debt
If you have credit card debt and don’t have an emergency fund, you might wonder how to balance saving vs. paying off debt. Here’s a quick guide to how to balance both:
- Build a starter emergency fund (I recommend either saving at least 1–2 months’ expenses).
- Aggressively pay off all high-interest debt.
- Finish building your 3–6 month emergency fund.
Building a starter emergency fund will give you some cushion in case you encounter emergency expenses while you’re paying off your high-interest debt. It’s important to pay off all high-interest debt before finishing your emergency fund because the longer you have high-interest debt, the more money you’ll lose to interest payments. Building the rest of your emergency fund will be so much easier once you pay off that high-interest debt.
Navigating discretionary spending while you build your emergency fund
How much you should spend on discretionary expenses will depend on your income, your current level of emergency savings, your current savings rate, and your income-to-necessary expenses ratio. If you earn a low income, it’s absolutely vital to heavily prioritize saving for your emergency fund over discretionary spending (if you can afford discretionary spending).
Some personal finance experts advise temporarily cutting out all discretionary spending if you don’t at least have some emergency savings, while others advise cutting back on discretionary spending while you build your emergency fund.
It’s best to treat not having an emergency fund as an emergency and temporarily cut out all discretionary spending until you at least have a starter emergency fund; if you only have a little money leftover after your necessary expenses, you want to maximize the amount of money that will go toward building financial stability. Temporarily cutting out all discretionary spending lets you focus on building a savings muscle and training your brain to prioritize your long-term financial wellbeing over instant gratification.
Whatever your approach is, it’s important to automate your savings contributions and pay yourself first to make sure that you are contributing money to your emergency fund before you even think about allocating money for discretionary spending. We’ll discuss the specifics of discretionary spending in more detail later.
2. Focus on building a starter emergency fund.
If building a fully funded emergency fund is too overwhelming, set a goal of building a starter emergency fund. A starter emergency fund is a stepping stone on the path to building a fully funded emergency fund of 3–6 months’ expenses. Consider targeting 1–2 months of expenses for your starter emergency fund. Once you reach this goal, you’ll have more confidence in your ability to save, and building a fully funded emergency fund will seem more attainable.
3. Set small milestones instead of focusing on the end goal.
Once you identify how much money you need to have saved in your fully funded emergency fund, break that number down into smaller milestones that feel more manageable. Focus on just getting to the next milestone instead of ruminating on the bigger picture. If you can only afford to save $20 a paycheck, for example, consider setting milestones in $100 or $200 increments if that feels manageable. Or consider setting milestones in increments of one month’s expenses: In other words, set a goal to save 1 month of expenses, then 2 months of expenses, then 3 months, and so on.
4. Put your money in a high-yield savings account.
High-yield savings accounts are different than traditional savings accounts in that the best high-yield savings accounts typically earn between 4.50–5.30% interest per year, whereas traditional savings accounts only earn 0.45% interest per year.
If you live paycheck-to-paycheck because of a low income, you absolutely should consider putting your savings in a high-yield savings account because you want to make every dollar count towards helping you reach your savings goal. Not putting your money in a high-yield savings account is just saying “No” to free money.
5. If you’re under budget, allocate your leftover money toward your emergency fund.
One of the most powerful tools you have at your disposal is to get into the mindset of making every dollar count toward your financial goals. This means that every dollar should have a specific purpose and that no dollar is too insignificant to be allocated toward your financial goals.
If you spend less than what you budget for and have money leftover in your bank account, don’t let that money sit there without a purpose. Instead, move that money into your savings account to build your emergency fund. Once you start the practice of making every dollar count, you’ll find that you’ll be able to skyrocket your progress toward your savings goals.
6. Allocate all unexpected income towards your savings — even if it’s just a few dollars.
This is just an extension of the idea that you should make every dollar count. Any time you have unexpected income (even if it’s just $5), allocate it towards your savings. If you are able to pick up any odd jobs, have unexpectedly high tips at work, or get any bonuses at work, get in the habit of allocating that money towards building your emergency fund.
If you treat every spare dollar as if it can make an impact on your savings goals, you will be amazed at how much incremental progress adds up to make a positive change in your financial life.
7. Don’t tell yourself that any effort will be too small to make a dent in your savings goals.
One of the biggest objections to the idea of making every dollar count is feeling as if nothing you do will ever change your financial life. Don’t get into the habit of telling yourself that there’s nothing you can do. That mindset will only accomplish one thing: keeping you in financial instability. The only way out of a financial rut is to do something, even if you’re only saving small amounts at a time.
Similarly, one of the hardest roadblocks to saving money (besides not having any money to save) is actually overcoming the inertia of not saving money. It’s easy to tell yourself that the amount is too small to matter, but saving just a few dollars at a time builds positive momentum that pays off in the long run.
This practice of saving just a tiny bit of money regularly will compound significantly over time: The more you tell yourself that any spare income will go towards savings, the easier and more motivating saving money will become — that’s because, like any other good habit, saving money will become a virtuous cycle.
8. Allocate your tax refund towards savings.
As of 2022, about 3 out of 4 Americans receive a tax refund, according to Bankrate. If you’re one of those people, putting your tax refund towards savings is one of the easiest ways to make significant progress in your savings goals.
Instead of budgeting that money toward discretionary spending, pretend that your tax refund money doesn’t exist so that you can immediately allocate it toward your savings goals.
9. Treat not having an emergency fund like an emergency.
Not having an emergency fund is an emergency; if you lose your income for a prolonged period of time, without an emergency fund, you won’t be able to pay for necessary expenses.
With this in mind, if you have a low income, consider some strategies to increase your savings rate, including:
- Picking up extra shifts or working overtime.
- Getting a second job and allocating all of that money toward your savings goals.
- Committing to consistently applying to jobs that only pay a livable wage—even if you don’t quite meet all the job requirements.
- Temporarily cutting back on discretionary spending (if you have any).
10. Cut out all discretionary spending — for now.
If you are spending money on discretionary items but don’t have an emergency fund saved, it’s a good idea to cut out all discretionary spending until you at least have enough emergency savings to cover 1–2 months of expenses.
Then, consider reintroducing discretionary spending but keeping it at a very low percentage of your net income—perhaps 2–4%. This may seem drastic, but again, not having an emergency fund is an emergency. If you live paycheck-to-paycheck, consider allocating every cent that’s not spent on necessities towards building your emergency fund. You need to do everything you can to get out of survival mode.
Temporarily cutting out all discretionary spending can also help you get more clarity on where your money is going and evaluate how much money you can reallocate toward your savings goals.
Cutting out—or seriously cutting back on—discretionary spending temporarily will not only help you build your emergency fund; it will also help you master the behaviors that create wealth and will transform your view of what is possible to accomplish if you adopt a laser focus on your finances.
11. Automate your savings.
Automating your savings is one of the best things that you can do if you can afford any discretionary spending at all. Automating your savings means setting up your direct deposit to automatically transfer a certain amount of your income to a savings account each time you receive a paycheck.
Instead of saving what’s leftover after you’ve spent money on discretionary spending, you should automatically save a percentage of your income or a specific dollar amount before spending anything on unnecessary expenses.
12. Evaluate whether the root of your financial hardship is a short-term, medium-term, or longer-term problem.
Which steps you take to increase your savings rate will depend upon whether your financial hardship is a short-term or longer-term issue.
Is your difficulty with saving money a short-term matter — for example, will you be able to comfortably save money once you cut back on discretionary spending and finish paying off a medical bill in 3 months?
Or are you not able to save money because your employer doesn’t pay you a livable wage?
If it’s the latter, then not being able to save for an emergency fund is a symptom of a larger, more unsustainable problem that needs to be addressed if you want to get out of a cycle of low-wage jobs: Ultimately, you need to increase your earning potential by learning more hard skills and applying only to jobs that pay a thriving wage.
If you’re underemployed or if you’re a low-income earner, you need to ruthlessly refuse to apply for jobs that continue to offer subpar wages — it is so easy to get stuck in a cycle of undervaluing yourself once you’ve been in a low-income job. Adopt the radical policy of applying only to jobs that pay substantially more than what you make now.
13. Approach saving money as self-care.
Many people who have discretionary income struggle to save money because they view it as a kind of punishment because it’s a restriction on the income they can spend today.
Saving money becomes a lot easier if you start to view it as an act of self-care instead of a punishment or restriction. By setting aside money for your emergency fund, you are taking care of your future self: You’re making sure that future you can still put food on the table, keep living in your home, and continue to pay necessary expenses in case you experience a sudden loss of income.
By building an emergency fund, you’re protecting yourself from experiencing homelessness, accruing high-interest debt, and going through unnecessary financial stress. Building an emergency fund is a powerful act of self-care.
14. Remember that no matter your income, saving for an emergency fund is a big goal that is going to take a lot of time.
You’re not a failure if it takes you longer than you’d like to achieve your savings goals. Remember that any progress is good progress and that, for most people, saving for an emergency fund is more like running a marathon than doing a 100-meter dash. So keep contributing consistently to your emergency fund and eventually you will get to a place where you’re comfortable with your emergency savings.
These 14 strategies will give you the tools you need to tackle building an emergency fund even if you earn a low income. Building an emergency fund takes time, but it absolutely is possible if you work at it consistently.