This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Building emergency savings is tough when you’re a lower earner. Read on to see how much money is reasonable to put in the bank on $25,000 a year.
A recent SecureSave survey found that 67% of Americans don’t have enough cash on hand to cover a surprise $400 expense. And that’s pretty scary. But if you’re in that boat and you’re a lower earner, that’s totally understandable.
It’s one thing to earn $75,000 a year and have less than $400 in savings. But it’s another thing to earn one-third that much. In that case, it’s easy to see how every dollar of yours gets eaten up by living expenses, whether it’s car payments, medical bills, or food. There may not be more than a few dollars left over, if that, by the end of the month.
That said, it’s really important to have a solid emergency fund to fall back on, no matter what you earn. Yours might have to start off small and get built up over time if you only earn $25,000 a year, and that’s okay. But the key is to start somewhere.
Building that safety net takes time
The whole purpose of having an emergency fund is to have money in the bank to tap when unplanned expenses arise. That money could help you avoid racking up costly credit card debt.
As a general rule, it’s a good idea to have an emergency fund that’s large enough to cover three full months of essential bills. That way, if you were to lose your job, you’d have money to tap in order to cover your expenses while looking for work.
As such, your emergency fund should be a function of what you spend each month on essential bills. If that amount is $1,500, then you should aim for a $4,500 emergency fund.
READ MORE: Emergency Fund Calculator
If you’re thinking that sounds like a joke based on your income, then rest assured that no one in their right mind would expect you to build a $4,500 emergency fund in one year on a $25,000 salary. After all, that’s 18% of your income.
But is it possible to save 5% of your income, or $1,250, in a single year? That may be doable if you’re able to live very frugally and only spend your money on essential bills. And while $1,250 doesn’t give you enough cash to cover three months of bills, it gives you some protection.
It means that if you end up facing a sudden $700 car repair, you won’t have to charge it on your credit cards and rack up interest due to not being able to cover your balance in full. So it’s a good start.
However, even $1,250 may not be realistic anytime soon, and that’s okay, too. In that case, pledge to save something every month. It could be $10, $20, or $50, depending on what you can swing.
Do your best
Having any amount of money in savings is better than having none at all. So take a look at your expenses and see if there’s anything you can cut back on to free up a small amount of money on a monthly basis. And if you’re able to set aside $40 a month for the next 10 months, then hey, you’ll be better off than the 67% of Americans who don’t have so much as a $400 balance in their savings accounts.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 11x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.