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You’ve likely heard of an emergency fund. It’s a small safety net of savings designed to help you manage during a financial crisis. In some cases, it’s also wise to use an emergency budget— a reduced spending plan that ensures your fund lasts as long as needed.
Experts generally recommend having enough saved to cover 3-6 months’ worth of living expenses in your emergency fund. Some emergencies are smaller in scale. For instance, a $500 car repair might only cause a slight dip in your fund. But for larger emergencies, like losing a job, your emergency fund is meant to help you get by for a while. It’s crucial that your fund lasts as long as possible during these times, especially since you won’t have a steady income. That’s where an emergency budget becomes essential.
When you’re relying on your emergency fund, keeping your living expenses as low as possible is key. It may not be the most enjoyable budget to follow, but it will make you thankful that you planned ahead. It will help maintain your financial safety net for as long as needed.
Begin by Reviewing Your Current Budget
To create your emergency budget, you’ll need to compare it with your existing budget, so it’s crucial to ensure that all your expenses are accounted for and up-to-date.
We’re assuming you’re familiar with Budgeting 101 and have already set up a basic budget. Your emergency budget will be built upon that foundation.
We’re also assuming you’ve established an emergency fund (which is essential!). Some people have enough wealth and multiple steady income streams that they don’t even need an emergency fund. For them, an emergency budget might not be necessary. However, it’s mainly intended for those who would rely heavily on their emergency fund during a financial crisis.
Start by reviewing your current budget and its categories. Whether it’s on a spreadsheet or in an online tool like Mint, pull it up and check your primary spending categories. Ensure everything is up to date. Don’t forget about irregular expenses—quarterly insurance payments, estimated taxes, and annual fees—these should be included in your budget if they aren’t already.
You can set up your emergency budget in a spreadsheet, on paper—whatever works best for you. When I created mine, I simply adjusted my categories in Mint.
Eliminate Non-Essential Spending
Now that you have your categories in front of you, the first thing to examine is non-essential spending.
Wants, discretionary items, spending money—whatever you call these expenses, the approach is the same: cut out what you don’t really need. Review your budget for anything that isn’t a necessity and remove it. For me, this included personal care, dining out, and shopping. No haircuts, happy hours, or impulse buys when I was on an emergency budget.
Sure, budgets need some space for enjoyment. Like dieting, if they’re too strict, you’re less likely to stick with them. But an emergency budget isn’t meant to be permanent. It’s there to help you get through a financial crisis. So, don’t hesitate to trim the excess—it’s just temporary.
That said, there are a few exceptions to cutting out every non-essential.
First, think about the cost of cutting out your luxuries. For example, let’s say you have cable. You want to cancel it now because of your financial emergency, but once things stabilize, you plan to get it again. In this case, you should weigh the cost of setting up the service again, returning the equipment, finding a good deal, etc. This isn’t to say you shouldn’t cut out this luxury—if you’re struggling, spending on cable might not be the best choice. But it could depend on how severe the emergency is. If you have a good reason to believe you’ll recover soon, consider the time, cost, and effort of cancelling it just to reinstate it later.
Also, you’re the best judge of your spending habits and the specifics of your emergency. Maybe you’re comfortable keeping a few non-essentials. You might have room to add some back into your budget, depending on your situation. But first, you need to see what you’re truly working with once your budget is pared down. Cutting all non-essentials is the first step in that process.
Reassess Your Financial Goals
You don’t want to ignore long-term savings. It’s important to continue contributing to your retirement and stay on track with your debt repayment. However, during an emergency, you’ll need to reassess these goals. Why? Because without income, you’re likely using your emergency fund to cover those goals. Do you want to keep paying down debt or saving for retirement? Or would you prefer to minimize the drain on your emergency fund? Your answer will influence your emergency budget.
In essence, you’ll need to decide whether to:
Continue working towards your goals and replenish your emergency fund later, or ;
Lower your savings or debt goals or pause them until your income resumes.
If you opt for Option 1, you’ll stay committed to your goals and include them in your emergency budget. If you go with Option 2, adjust your emergency budget accordingly.
When it comes to savings goals, it’s likely best to pause them while you're in emergency mode. However, debt goals are trickier because interest is accumulating. To help you decide what to do about debt goals during an emergency, take a look at expert advice regarding emergency funds versus debt repayment.
Some experts suggest prioritizing high-interest debt over maintaining an emergency fund. If you agree, you might consider keeping your debt repayment goals in place, even if it means tapping into your emergency fund faster. For instance, here’s what You Need a Budget (YNAB) recommends:
When determining how to allocate available cash (including any “buffer” funds, new income, and even current spending), focus on the “risk of new interest charges.” Existing debt guarantees interest expense, so it should be the top priority for all available funds, even if that means a smaller emergency fund...
I'd keep the smallest buffer needed for peace of mind, and then direct all extra funds toward paying down that credit card debt.
In this scenario, you can lower your debt repayment amount if your emergency fund reaches that “smallest buffer” level.
On the other hand, Money Crashers recommends saving a bit more before focusing on debt repayment:
While paying off debt first can improve your credit score and provide peace of mind, it doesn’t help during an emergency. If you use all your funds to pay down debt, you’ll have nothing saved for unexpected situations.
Build a six- to eight-month emergency fund, which will support you in case of job loss, divorce, or illness. It also protects you from falling deeper into debt while dealing with an emergency.
If this advice resonates with you, consider reducing your debt payoff efforts during your “emergency mode.” Think about this guidance and weigh it against the specifics of your own circumstances, including:
How much is currently in your emergency fund
How likely you are to deplete it, and how soon that might happen
How long it will be before you have a reliable income stream again
From there, establish a savings target or debt repayment amount for your “emergency budget” that feels right for you. Plan to pause or reduce any transfers or automatic payments while you're in emergency mode.
Cut Back on Fixed Expenses
After reviewing your non-essentials and financial goals, it’s time to take a hard look at your must-have expenses. These are the bills you pay regularly, like your cellphone bill, rent, or car registration.
These expenses are fixed, but that doesn’t mean they can’t be reduced. List your essential fixed costs and check if there’s room for savings. Here’s what I did when I was in emergency mode:
Switched to a discount cellphone provider
Negotiated for a more affordable internet plan
Shopped around for a lower car insurance rate
When it comes to insurance rates, you may be tempted to cut back on coverage during an emergency. Perhaps you're considering canceling your comprehensive coverage or skipping renter’s insurance. But remember, during times of crisis, that’s when you need protection the most. To me, this is exactly the wrong time to reduce something like insurance. Trim your fixed necessities, but don’t take the risk of going without something that could worsen your situation.
Be Cautious With Variable Expenses
After you've looked at your fixed necessities, it’s time to focus on your variable expenses. Start by reviewing those essentials that fluctuate every month: electric bills, groceries, and fuel, for example.
Next, find ways to trim costs in these areas. I Heart Budgets suggests focusing on food, which can vary quite a lot:
Cut back on your food spending. I know, it’s tough. But if you lose your job, you’ll find a way to shave $50 off your food budget, even if it means sacrificing some of your usual healthy choices. There's no reason to starve just because you “needed” your organic pine nuts.
For other categories, you might find our step-by-step bill guide useful. Here are some more key tips for cutting costs on variable necessities:
Electricity:
Eliminate vampire power
Use appliances at night
Identify power-hungry devices. Unplug when not in use.
Gas:
Carpool
Use public transportation
Check for the most affordable days to fill up in your area
Groceries:
Find ingredients that extend meals
Base your shopping trips on sales
Minimize food waste
These are just some initial suggestions, of course. They may not apply to everyone in every scenario.
Clearly, practicing frugality is beneficial, whether you're in emergency mode or not. However, this is the time to revisit those frugal strategies you might have previously dismissed because they seemed inconvenient or unnecessary. When you're in emergency mode, convenience becomes secondary. Slash your variable expenses as much as you can. If you're new to frugality, check out these basics.
Even if you’re creating this budget before an actual emergency strikes, it’s valuable to identify which categories are variable and which frugal options are available should you face a crisis.
Strategically Rebuild from Your Skeleton Budget
Once you’ve pared down your budget to its essentials, it’s time to assess the numbers. After trimming luxuries, embracing frugality, and reducing necessary expenses, what does your monthly spending look like? This is the amount you’ll need to withdraw from your emergency fund each month while in crisis mode.
You know your own habits and circumstances. While I lean toward cutting all non-essentials during an emergency, you may feel more comfortable keeping a few minor luxuries in your budget. In that case, think about how much you’re willing to add back, based on the emergency fund you've saved and the expected duration of the emergency. Alternatively, you could wait until things improve slightly and gradually reintroduce those luxuries.
Once the emergency has passed, you can begin to restore your pre-crisis routine. After my own emergency, I found some extra income through a side gig. From that point, I began rebuilding my budget with the following steps:
Secured a small stream of income through a side gig
Refilled my emergency fund
Reintroduced a few of my 'wants'
Started putting money into savings again
Adjusted other categories of my budget as needed
Gradually brought back more 'wants' as my income stabilized
Having an emergency fund can provide much-needed relief during tough times. However, you also want to ensure that fund lasts. If your emergency turns out to be long-term or you find yourself in a financial bind for longer than expected, it can be crucial to have an emergency budget in place. Emergencies are inherently stressful, and anything that helps reduce that stress will allow you to concentrate on getting back on your feet.
Image by nick criscuolo.
