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How to Build an Emergency Fund During a Downturn

By Kate Rockwood | July 10, 2020 | Rally Health

In the past, starting a rainy day fund might have meant leisurely saving up cash for some future financial bump in the road. But when the bump is already here, as is the case with the economic disruptions from COVID-19, it’s time to kick emergency fund plans into high gear. 

Having an emergency fund can mean weathering an unexpected cost like a car repair or a medical emergency without needing to rely on high-interest debt like a credit card or short-term loan, says Nadine Burns, a certified financial planner and CEO of A New Path Financial. That’s well worth it since high-interest debt can be very hard to pay off, she adds.

Even an emergency fund as small as $250 may lower your chance of being evicted or missing a housing or utility payment, a study by the Urban Institute found. Having an emergency fund also helps people bounce back more quickly after a job loss, income drop, or health issue. Most experts recommend having at least three months worth of expenses saved, but only 45% of Americans have saved that much. 

Fortunately, it is possible to save up money in tough times. Still, it will take some work to trim your expenses and find a savings method that works best for you. But all emergency funds “start with a scavenger hunt for leaky money and intentional savings,” Burns says. 

How much do you need?

Most financial pros recommend having three to nine months worth of expenses in your emergency fund, says Dan Herron, a certified financial planner with Elemental Wealth Advisors. If that sounds daunting, remember that you need to start with only a few dollars.

“One of the simplest ways to start saving is to have a set dollar amount — $5, $10, $20 — automatically transferred from your checking account to a savings account on a recurring basis,” Herron says. You can even treat your emergency fund like a bill that must be paid each month.

Herron recommends keeping your emergency fund separate from your regular savings or checking accounts. The money should also earn some interest and be easily accessible. Good options might include keeping the money in a high yield savings account or a money market account, he says. 

To figure out exactly how much money you need to cover your expenses each month, comb through your tax returns and credit card and bank statements. You can use an online tool like this Home Budget Calculator to plug in all your revenue and expense numbers.

Separate your expenses into “must pay” and “discretionary,” Burns says. Your must-pays are things like your rent or mortgage, health insurance, utilities, food, and debt payments. Discretionary spending might include clothing, subscriptions, entertainment, gifts, and memberships. Add up all the must-pay items, to find out how much you need to save to fund a month’s worth of expenses.

“Hopefully you can get up to three months worth of your must-pay items so you can make it through a crisis, layoff, job cut, or major illness,” Burns says.

Dial down expenses

If money is already tight, finding places to cut back in your budget can be tough, but it can be done. Good places to look are cable TV, utilities, and food, says Charles Thomas, a certified financial planner and founder of Intrepid Eagle Finance in Clover, SC. 

The average US cable bill is just over $217 a month. You can cut the cord altogether, choose a less expensive cable TV package, or try to negotiate a discount, he says. With utility bills, you can help control your costs by turning the thermostat down or up, sealing door and window cracks, taking shorter showers, or turning off lights when you leave the room. 

Food is obviously a necessity, but you can control your costs by ordering out less and shopping smarter. Groceries are expensive, especially now. Food prices jumped 2.6% from March to April this year. To save at the store, look for sales on your most expensive items, like meat or fish, buy veggies and fruit in season, and plan meals that make leftovers. You can also set a goal to reduce your grocery budget by a certain percentage each week and put that money toward  your emergency fund, Thomas says.

Stash extra cash

Did you get a tax refund, a rebate check, or $20 in a birthday card from Grandma? Those are exactly the kinds of unexpected or once-in-awhile extras that you should earmark for your emergency fund. 

Another place to look for extra cash is your retirement contributions. That shouldn’t be your go-to move because your money goes further in down markets, but if temporarily dialing down or stopping your retirement contributions can help you put an emergency plan in place, it might be worthwhile. 

“If stopping or lowering your contribution means the difference between making a payment on a high-interest debt like a credit card, then consider it, but for most folks, it’s not the best option,” Thomas says.

If your employer matches 401(k) contributions, try and continue contributing as much as they match so you don’t leave free money on the table, he says.

If you’re really struggling to build an emergency fund, another possibility for getting cash in place is applying for a home equity line of credit (HELOC). A HELOC allows you to draw money from a line of credit and pay back only what you borrow, not the entire amount that is available.  

HELOCS typically have much lower interest rates than credit cards, but you will still have to pay interest on anything you borrow. The big risk is that these lines of credit are secured by your home, so if you can’t repay the loan, you risk losing your house.

Congratulate yourself!

When you reach your emergency fund goal, don’t forget to celebrate, Herron says. “Having the discipline to get adequate savings can be tough, so give yourself a pat on the back,” he says.

And if an emergency pops up and you need to spend some of the money, don’t feel bad — that’s what the fund is for. Just make sure to set up a plan to replenish the fund when you can.

“Emergency funds really do help you sleep better at night,” Burns says. “They take away the stress of not knowing if you can handle a financial crisis, whether big or small.”

Note to our readers: This information is being made available as a free resource to the public. It is not an endorsement of any of the Finance-Related Resources listed in this article — financial consultants, planners, services, organizations/associations, websites, tools, lenders, credit unions, or banks. None of the Finance-Related Resources listed have solicited Rally Health to be included, and Rally Health receives no compensation from the Finance-Related Resources mentioned in this article.

Kate Rockwood
Rally Health