How to build an emergency fund when you live from paycheck to paycheck

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• As a financial planner and CPA, I am adept at “finding the money” for clients to help them achieve their financial goals.
• Building an emergency fund is a goal for many people, especially in the era of COVID-19. I recommend that you first review your withholding tax to see if you can adjust it to increase your cash flow and save more.
• I also recommend using your employer’s perks – including flexible spending accounts, health savings accounts, and employee discounts – to save money.
• Visit Vanguard Personal Advisor Services® for the investment advice you need to help you build the life you want ”

In 2010, when I started incorporating financial planning into my CPA practice, I struggled to find that thing that would set me apart from other professionals in the industry. I took stock of my skills, reflected on my journey and consulted mentors. Then I thought, “I can make sense of the numbers and help clients find the funds to execute strategies they didn’t think they could afford.”

Communicating this value proposition to clients was an instant success as I quickly established myself as a finance professional helping clients “find the money” to do many things in their financial plan: buy a adequate insurance, set aside money for retirement, save money for their children’s colleges, and building or strengthening their emergency fund.

Emergency funds are a pillar of the financial planning process

This brings me to the subject of emergency fund. As a central pillar of the financial planning process, the emergency fund goes hand in hand with insurance to ensure that families are able to weather any storms they may face on their financial journeys. Indeed, if the COVID-19 pandemic has taught us anything, it is that having cash to deal with a sudden and unplanned work stoppage, illness, layoff or leave is prudent and can do the difference to keep your finances afloat.

It is generally recommended to families are three to six months old non-discretionary or necessary household expenses housed in a highly liquid and secure account, such as a savings account. With such funds in place, a family would be able to deal with financial emergencies, such as a major auto repair, an unscheduled home repair or medical expenses, or an unforeseen job loss. However, reaching such a level of funds is easier said than done.

Numerous studies show that many American households struggle to raise $ 400 at any one time, so it is often said that the goal of building an emergency fund is for “better-off families” or “wealthy customers.” I’ll defer the discussion to my high income clients for another time, but let’s just say that several of them are in the same boat as my low income clients. With such a challenge, one might ask, “How does a household achieve such a goal when so many people are struggling to reach the end?” ”

How to build an emergency fund with limited income

This is where my superpower comes to life – I can step up to my CPA hat and become a sleuth who analyzes a family’s finances and “finds the dollars” to fund the financial goal. Here are some of the things that I identify as easy ways to find the money to fund an emergency savings account.

Income tax returns

One of the easiest “furniture” to find for money is the tax return. The average federal tax refund ranges between $ 2,700 and $ 3,100, but unfortunately many families view these funds as a “bonus” and spend the money (or pay off bills that have been accrued in anticipation of the aforementioned repayment). Worse yet, these funds are held with the IRS and earn you no interest while your debts accumulate interest on a daily basis.

Instead of letting this money rest with the IRS, I recommend that you change your payroll deductions so that you can have these funds available during the year and build your emergency fund.

Benefits for the employer

Your employer often offers a number of benefits which, if chosen and used correctly, can save you money that can be used to build your emergency fund. They understand:

Flexible Spending Accounts (FSA): FSAs can be used either for dependent care (for children under 13) or for medical expenses, and are funded by pre-tax contributions. Not only are federal contributions exempt from tax, but they are also exempt from Social Security and Medicare (“FCIA”) taxes, which represents an additional 7.65% of taxes saved.

Using these benefits can potentially save you several hundred dollars at a minimum – money that you can save in your emergency fund.

Health savings accounts (HSA): If a high deductible health insurance plan makes sense for you and your family, you can access an HSA, which allows you to add funds on a pre-tax and pre-FICA basis. In fact, many employers will put money in your HSAs because your HSA contributions (through payroll deductions) save them money by reducing payroll taxes. That’s still a few hundred dollars in taxes saved at a minimum.

Discounts for employees: Fifteen percent off your monthly cell phone bill, the rates used on your home and auto insurance, and discounts on certain daily purchases are examples of discount plans some employees have. Taking advantage of these benefits can lead to hundreds of savings which can be redirected to your emergency fund.

These strategies, if applied consistently over a measured period of time, can help fund your emergency fund to bring it to the levels needed to provide meaningful protection for your family.