One of the most important personal financial moves a person can make is building an emergency fund. This fund helps you avoid going into debt when the unexpected happens and can serve as a cushion during major life changes, such as periods of unemployment. However, these major emergencies can cause a fund to deplete quickly.
When you get back on your feet, you will need to replenish your emergency savings. This can seem impossible, especially if you already made cuts to your budget to stay afloat during the emergency. However, emergencies can occur back to back, so you want to be prepared with a replenished fund. Some tips to keep in mind when it comes to restoring an emergency fund include the following:
1. Recreate the budget.
Though you may have created a strict budget when going through a financial crisis, you shouldn’t abandon it now that the crisis is over. Your monthly expenses need to remain below your income to replenish the emergency fund quickly and continue saving toward other goals. In general, replacing the emergency fund should take precedence over these other goals since you will be able to reconfigure your budget and redistribute to them once the fund is intact. Unfortunately, this budgeting often means forgoing luxuries like dining out and buying new clothes, but these sacrifices are temporary. It’s critical to rebuild your emergency fund. If you budget well, you can set a timeline and make sure you stay on track, which also helps you establish a finish line you can look forward to.
2. Consider a side hustle.
Finding a temporary side job is one way to get a small flow of income coming in, perhaps allowing you to loosen an overly strict budget. Ideally, you will need just a few weeks or months of working a side job to restore your emergency fund, especially if you are making sure to funnel all of your extra earnings toward it.
Some people can pick up extra shifts at their job to bring in extra income, but the rising gig economy has made it easier than ever to get some additional money. Depending on the time of year, you may be able to find seasonal work. Those further along in their career may be able to land a couple of consulting jobs to boost income. Importantly, a side hustle should not feel like torture. You can likely find something you like doing, whether that means selling homemade crafts on an e-commerce website or doing odd jobs for friends.
3. Recoup expenses if possible.
Depending on the nature of the emergency, you may have ways of recouping some of your losses, whether that means through insurance, warranties, or government programs. Investigate all options available to you so you can minimize your financial burden. Sometimes, pursuing these options takes an investment of time, so it is likely necessary to use the emergency fund to make ends meet as you wait to recoup your losses. When you’re eventually reimbursed, make sure to refill the emergency fund rather than divert it to other expenses. Using recouped money to replenish the emergency fund can relieve a lot of the pressure even if it does not end up covering the entire amount.
4. Cut out one major expense.
A strategy that many people have used with success is temporarily cutting out one major expense to help replenish the emergency fund faster. You can start by looking at your current spending patterns and figuring out what is not essential. Sometimes, this means downsizing to a smaller apartment for a year to save on rent or selling your car and turning to public transportation for some time. This strategy does involve hard sacrifices, but they are only temporary.
You can begin by calculating exactly how much money you can save by making this sacrifice, helping you determine a timeline. While making such a major life change may seem overwhelming at first, it is a short period in the long run and can help you avoid significant issues down the line.
5. Open the right account.
For the most part, an emergency fund should be placed in a high-yield savings account. People who have their fund in a traditional account may be losing money, as the growth in these accounts does not keep pace with inflation.
On the other end of the spectrum, investing an emergency fund is a poor idea since it reduces the liquidity of the money and puts the whole amount at risk. You should remember that virtually all investments carry risk, even “safe” ones like federal savings bonds. A high-yield savings account helps the money grow, even if slowly, while it sits. Luckily, opening a high-yield savings account is quite easy these days—several online options take mere minutes. Just make sure to do your due diligence before making a decision.