The best tools to build an emergency fund when you live paycheck to paycheck

An emergency fund is a critical part of any financial plan. Budgets and savings goals fall by the wayside if you don’t have money set aside for an unexpected expense, whether it’s a surprise car repair, a doctor’s bill or sudden unemployment.

According to a recent CNBC and SurveyMonkey Quarterly Money Survey, 63% of Americans say they are living paycheck to paycheck. Half of those surveyed said just a one-week delay in pay would cause a major financial hardship.

Creating a safety net can seem impossible when you’re barely able to cover your expenses, but that’s when you need one the most. The key to building an emergency fund when you’re living paycheck to paycheck is starting small.

If you have sizeable expenses that are predictable but difficult to budget for, like vet visits or new tires, consider a separate sinking fund, rather than taking money out of your emergency fund.

It can feel like money disappears as soon as it comes in, but making a monthly budget can help you see where it’s really going. A back-of-the-envelope approach is okay, but there are free budgeting apps that help you organize your finances and spot small changes you can make.

Rocket Money has a free version that tracks spending, subscriptions and bills across all your linked accounts. SoFi Relay can automatically organize transactions into 15 main categories and 100+ subcategories, while Goodbudget lets you create individual buckets, or savings goals, including for an emergency fund.

It’s a smart idea to keep your emergency fund somewhere separate from your everyday checking account so it’s harder to dip into. Money in a high-yield savings account (HYSA) can earn a healthy return and still be accessible when the time comes. And setting up a regular automatic transfer lets you build your emergency fund without thinking about it.

Happen Bank’s LevelUp Savingshas one of the most robust APYs on the market and is one of the few HYSAs to come with an ATM/debit card.

If your emergency fund earns 4% APY, but your card charges even 10% APR (less than half the national average), you’re losing money by charging that expense and keeping the cash invested.

If your car needed a $1,500 repair:

• Paying with an emergency fund: You’d spend $1,500 and give up roughly $60 in interest you could have earned over a year at 4% APY.
• Paying with a credit card: If you’d charged $1,500 to a credit card with a 10% APR and carried the balance for a year, you’d pay roughly $150 in interest.

If you use savings, your future paychecks aren’t committed to paying off an old emergency.

That said, you don’t necessarily want to drain your emergency fund completely. If an expense is large enough that paying cash would leave you with no buffer, it may make sense to use a combination of savings and credit. But paying that card down aggressively is now your top priority.

If your insurance premiums have skyrocketed from last year, start shopping around for another provider. You may be able to save by taking a defensive driving course or bundling your auto and home/renters insurance with the same company.

If you have medical bills, you may be able to negotiate a payment plan with the hospital or doctor’s office.

If you’re in a debt cycle paying just the minimum on your credit cards, a debt consolidation loan could combine them into one payment with a lower APR, saving you money on interest.

If your credit is spotty, Upstart considers factors beyond your credit, including your education history and work experience. Another top lender, LightStream, will beat a competitor’s qualifying offer by 0.10%.

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