How to build an emergency savings fund during an era of inflation

In the midst of inflation, it’s probably harder — and more daunting — to find extra cash for an emergency fund. The latest inflation data from the government’s September consumer price index report isn’t helping. It showed on Thursday that despite the Federal Reserve’s efforts to slow the economy and lower prices by raising interest rates, inflation is not going away – in fact, prices for a wide range of goods and services rose again and inflation rose even higher than market expectations.

“It’s challenging because more of their discretionary income is being spent on things that aren’t generally discretionary,” said Jeffrey Mattonelli, financial advisor at Van Leeuwen & Company in Princeton, NJ. “They’re probably not eating less, and they still need the same amount of household goods, they’re just spending more.”

Luckily, there are fairly easy options for people looking to top up their savings for emergencies. Here are five tips to start building an emergency fund or save even more if you already have one.

It has to start with a spending plan

Start by making a spreadsheet so you know what it takes to run your household on a monthly basis. Your list should include any expenses you might incur, such as rent, groceries, insurance, utilities, car payments, charities, student loans and vacations, said Lori Gross, a financial advisor at the Outlook Financial Center in Troy, Ohio.

Doing this can help you better understand what’s left for savings needs like retirement, college, long-term care and an emergency fund, she said.

In general, experts advise having three to twelve months’ spending ready as an emergency fund. How much buffer depends on factors such as age, life stage, job security and income predictability.

Save regularly and automatically

Instead of throwing money into an emergency fund on an ad hoc basis, create a line item in your budget so you contribute every paycheck or month until you reach your goal, said Sam Waltman, senior wealth advisor at Kayne Anderson Rudnick in Los Angeles.

Whatever amount you choose, consider it non-discretionary and set it to go to an account designated for emergency purposes, he said.

Treat yourself to weekly ‘fun money’

Many people spend too much money on leisure activities, leaving less money available for emergencies. To mitigate this problem, Gross asks clients to set aside a certain amount of cash for weekly fun money and hold themselves accountable (don’t leave fun money off the spending plan table). And don’t give in to the temptation to use a credit card to make up the difference. Although you may tell yourself that you’ll spend less the following week, you probably won’t, she said.

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Gross also advises his customers to pay their credit card balance in full every month. If you carry a balance with you, you will accumulate interest that will affect your ability to save for emergencies. “It’s a lot better to pay yourself than someone else,” she said.

Check subscriptions

Examine your monthly expenses — especially the subscription-based ones — to see where you can shed fat. While 95% of Americans believe subscriptions will become more important in the next few years, 20% say they already feel like they have too many, according to a July SurePayroll poll.

Recurring fees could include magazines, streaming and television services, special mailing subscriptions, gym and recreational memberships, home maintenance, landscaping and house cleaning, Waltman said.

“If you peel off the shifts, you might find that you have some sort of recurring payment plan, and it doesn’t necessarily have to be if you’re not using the service or getting value from the service,” he said.

Search for lost funds

There are a number of unconventional places people can look for “hidden money” to top up an emergency fund, said Chris McMahon, president and chief executive officer of Aquinas Wealth Advisors in Pittsburgh.

For example, a person may have an old life insurance policy purchased from a parent. The policy may have accumulated cash value that can be used as an emergency savings buffer, he said.

Another option, if you’ve done your own taxes, is to work with a tax professional to see if any deductions may have been missed on recent tax returns. If you’ve been working with the same accountant for years, a second opinion might be in order, too, he said. Filing an amended statement isn’t difficult, and the cost of using an accountant can pale in comparison to the money found, McMahon said.

A tax refund could also be used to build an emergency fund, Mattonelli said. Better yet, readjusting your withholding tax each month could mean more money in your pocket to set aside for an emergency, he said.

Another idea might be to stay with a family member and rent out your home for a few months. McMahon had clients from Alabama who could make about $42,000 by renting their home to football fans during college season. Another customer rented their car through Turo, the peer-to-peer car-sharing company, and made about $4,300 in 90 days.

Others have lined up their coffers with side hustles, delivering evenings for Uber Eats or selling items through companies like Poshmark, a social commerce marketplace, or The RealReal for authenticated luxury mail.

“Sometimes people feel like there is no scope for additional savings. But there are specific techniques they can try,” McMahon said.

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