Emergency fund: how to start one even on a small income

A car that will not start, a medical bill, a broken appliance or a week without work can throw any family’s finances off track. This guide is for anyone who wants a cushion for those moments, even on a small income or with pay that changes every week. It explains what an emergency fundemergency fundAn emergency fund is cash you set aside only for unplanned expenses or emergencies, such as car or home repairs, medical bills or a loss of income. It is not for routine monthly spending. The CFPB explains that without savings, even a small financial shock can push you into debt that is hard to pay off. How much you need depends on your situation; the CFPB suggests thinking about the unexpected expenses you have had before. You can keep it in a bank or credit union account, on a prepaid card or in cash, and it grows more easily with automatic saving or part of a tax refund.See the full definitionClose is, how to decide how much to save, how to start, where to keep it safe and what it costs not to have one.

That the IRS can deposit your tax refund into, so part of it goes to savings

Up to 3 accounts⁵

Minimum FDIC insurance coverage per depositor and ownership category, at each insured bank

$250,000²

APR of a typical two-week payday loan, according to the CFPB

Almost 400%⁷

What an emergency fund is

According to the CFPB, an emergency fund is a cash reserve set aside only for unplanned expenses or emergencies: car or home repairs, medical bills or a loss of income. It covers payments large or small that are not part of your routine monthly expenses. And setting aside even a little helps you recover more quickly.¹

As the CFPB puts it, we have all had unexpected emergencies, from a fender bender or a damaged cell phone to a loss of income.¹

Why does it matter? Without savings, a shock, even a small one, can set you back, and if it turns into debt it can last a long time. People without a cushion sometimes end up paying with credit cards or loans, which leave debts that are hard to pay off, or pulling money from their retirement savings.¹

How much to save

The CFPB does not give one number for everyone: it says what you need depends on your situation. To set a goal, it suggests thinking about the most common unexpected expenses you have had and what they cost.¹ For example, the last time the car broke down or a doctor’s bill arrived.

If you live paycheck to paycheck or are not paid the same amount each week or month, setting money aside can feel hard. But even a small amount gives you some security.¹ A concrete goal helps you stay motivated, and starting your emergency fund can be that first reachable goal.¹

To see how much fits in your month, use the family budget tool or our guide to a family budget with several incomes.

How to start, even when money is tight

The CFPB says that if you have little room to save, the easiest ways to start are managing your cash flow and saving part of your tax refund.¹ These are its strategies:

Build the habit. Set a goal, pick a specific amount to set aside each time, check your progress regularly and celebrate when you succeed.¹

Manage your cash flow. It is the timing of when your money comes in and goes out. If it does not line up, you come up short at the end of the week or month. You can ask creditors such as your landlord, the power company or your card issuer to change your due dates, and use the weeks with more money to move a little extra into savings.¹

Use money that arrives all at once. For many people, the tax refund is one of the largest checks of the year, and money can also come as a birthday or holiday gift. Saving all or part of it helps you build the fund quickly, especially if your income is irregular.¹

Make it automatic. Set up a transfer from checking to savings at your bank or credit unioncredit unionA credit union is a not-for-profit financial institution that, like a bank, accepts deposits, makes loans and offers other services, but is owned by its members. Members elect a volunteer board of directors, and profits go back to them as lower fees, higher savings rates and lower loan rates. To join you need a common bond, such as your employer, your family, where you live or a group you belong to. It is chartered by the NCUA, a federal agency, or by a state. If the credit union is federally insured, your deposits are protected by the NCUA's insurance fund.See the full definitionClose. You decide how much and how often. Watch your balance so you do not pay overdraft fees, for example with alerts. If you are paid by direct deposit, ask your employer whether your paycheck can be split between two accounts. That way you pay yourself first: part of it goes to savings without you having to think about it.¹

Your emergency fund, step by step

1. 1. Decide what counts as an emergency

   Before you start

   Set rules and stay consistent: an unplanned expense is not the same as a monthly one.¹

2. 2. Set a goal

   This week

   Think about your past unexpected expenses and what they cost.¹

   Try it with your numbersFamily budget

3. 3. Open a place just for the fund

   This week

   A separate account at a bank or credit union, where you are not tempted to spend it.¹

4. 4. Set aside a fixed amount

   Every payday

   With an automatic transfer or by splitting your direct deposit; watch your balance to avoid overdrafts.¹

5. 5. Add the extra money

   At tax time

   Send part of your refund straight to your savings account.⁵

6. 6. Use it and refill it

   When you need it

   Do not be afraid to use it; if you spend it, start building it back up.¹

Example with real numbers

Split your refund to start your fund

An example in words using the IRS direct deposit option.

Your federal tax refund

By direct deposit, free

One part to your checking account

For this month's expenses

Another part to your savings account

Your emergency fund

Accounts you can split it into

Up to three

You split it with your tax software or, on paper, with Form 8888; the accounts must be in your name, your spouse's name or both.⁵ IRS VITA sites prepare basic returns for free for people who qualify, and many serve limited English-speaking taxpayers.⁶

Run it with your numbersFamily budget

Where to keep it

The CFPB says the fund should be safe, within reach and somewhere you are not tempted to spend it on things that are not emergencies.¹

Three places for your emergency fund

Generally among the safest

Bank or credit union account

• A dedicated account just for the fund may make sense.¹
• At an FDIC-insured bank, covered up to at least $250,000.²
• At an NCUA-insured credit union, similar coverage, automatically.³

You only spend what you load

Prepaid card

• It is not connected to a bank or credit union.¹
• Each card has its own terms, and most charge fees.⁴
• Some reloadable cards can receive your IRS refund.⁵

At home or with someone you trust

Cash

• It is within reach.¹
• It can be stolen, lost or destroyed.¹
• It does not have the insurance of an insured account.²

An insured account, separate from your spending account, meets all three things the CFPB asks for: safe, within reach and away from temptation.¹

FDIC insurance protects your checking and savings accounts at an insured bank if the bank fails: it covers at least $250,000 per depositor and per ownership category, and since 1933 no one has lost a penny of insured funds. It does not cover investments that are not deposits.² At a federally insured credit union, the NCUA provides similar coverage, automatically when you join. Careful: some state-chartered credit unions have private insurance without the backing of the U.S. government.³

If you do not have an account, the IRS points to the FDIC website or the NCUA Credit Union Locator to find a bank or credit union that opens accounts online. Some prepaid cards and mobile apps can also receive direct deposits if they have account and routing numbers.⁵ Our guide to low-fee accounts (Bank On) covers low-cost options, and the one on opening an account without a Social Security number explains what banks usually ask for.

When to use it and how to refill it

The CFPB suggests setting rules for what counts as an emergency and staying consistent. Not every surprise is a crisis: it may be a medical bill insurance did not cover.¹

Having the fund helps you avoid relying on cards or loans. If you pay for an emergency with credit, the cost can grow a lot through interest and fees. And do not be afraid to use it when you need it: that is what it is for. If you spend it, build it back up little by little.¹

To stay motivated, check your progress regularly: a balance alert or a sheet where you write down your running total. When you reach your goal, celebrate and set the next one.¹

If this is you

You are paid in cash

Cash at home can be stolen, lost or destroyed; a bank or credit union account is generally considered among the safest places.¹

Your income changes month to month

Use good months to move more into savings, and save part of any money that arrives all at once.¹

You live paycheck to paycheck

Even a small amount gives you some security; changing your due dates can open up some room.¹

Your family has several incomes

Look at when each person's money comes in and goes out, and set aside a fixed amount together.¹ Our family budget guide helps.

What it costs not to have one: payday loans

Without a cushion, many people turn to a payday loan. According to the CFPB, it is usually a short-term, high-cost loan, generally for $500 or less, due on your next payday. Many state laws allow fees of $10 to $30 for every $100. A typical two-week loan with a $15 per $100 fee equals an APR (annual percentage rate)annual percentage rate (APR)The annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. Besides the interest, it includes certain loan charges, such as discount points and some lender fees, spread over the life of the loan and expressed as a yearly percentage. That is why the APR is almost always a little higher than the interest rate. It is useful for comparing offers: if two loans have the same interest rate but a different APR, the one with the higher APR charges more in fees.See the full definitionClose of almost 400%; credit card APRs range from about 12% to about 30%. And the lender generally does not check whether you can repay.⁷

Before taking one, the CFPB suggests looking at alternatives: some employers, nonprofit organizations and community groups offer advances or emergency credit; there is also help from family or friends, cheaper options at your bank or credit union, or negotiating with whoever you owe. And if you expect a refund or extra income, use it to start saving for the next emergency.⁸ If a collection agency is already after you, our debt collection guide explains your rights.

Costly mistakes

• Mistake: Waiting until you have “enough” to start.

  Instead: Even a small amount gives you some security; start with what you can.¹

• Mistake: Keeping the whole fund in cash at home.

  Instead: Cash can be stolen, lost or destroyed; a bank or credit union account is generally considered among the safest places.¹

• Mistake: Setting up an automatic transfer without watching your balance.

  Instead: Use alerts or reminders so you do not pay overdraft fees.¹

• Mistake: Spending the entire tax refund.

  Instead: Send part of it straight to your savings account; the IRS can split it into up to three accounts.⁵

• Mistake: Reaching for a payday loan first.

  Instead: Check the alternatives first: advances, your bank or credit union, or negotiating with whoever you owe.⁸

• Mistake: Not using the fund for fear of emptying it.

  Instead: That is what it is for; if you spend it, build it back up.¹

What to do this week

1. List the unexpected expenses you had last year and what they cost, and set a goal.¹
2. Write down your rules for what counts as an emergency.¹
3. Open or choose a separate account at an FDIC-insured bank or NCUA-insured credit union.²
4. Schedule an automatic transfer every payday and a balance alert.¹ See how much fits with the family budget tool.
5. If you are filing taxes, note your savings account numbers so you can split your refund; a VITAVITA (free tax preparation)VITA (Volunteer Income Tax Assistance) and TCE (Tax Counseling for the Elderly) are IRS programs that offer free basic tax return preparation by IRS-certified volunteers. They are meant for people with moderate income, people with disabilities and limited-English speakers; TCE focuses on people sixty and older. The IRS sets no program-wide income limit, but individual sites may set their own. Many sites serve in Spanish and help with ITIN applications and renewals. Filing taxes every year builds the record lenders ask for.See the full definitionClose site can prepare your return for free if you qualify.⁶