ICBA Blog

Fast-Track Your Emergency Fund Growth

Determine how much you need as an independent contractor, and use these 6 methods to grow it

Every individual or family should have an emergency fund, but an easily accessible cash stash is particularly crucial for independent contractors to establish. As freelancers or gig workers, we have a bit of uncertainty to our cashflow. Sometimes the issue is clients who pay late, and other times, we face uncertainty with how much work we’ll have in a given month. Plus, illness, injury, and a general need for time off, can impact our earning potential. Like everyone else, independent contractors also face emergencies that require money, such as an unexpected medical or vet bill, a car or home repair, or even the need to purchase new equipment to do our work.

Determine your emergency fund need

Various financial experts suggest saving three to six months of your non-negotiable living expenses in an emergency fund. You can use this rule of thumb to set your initial savings goal. As an independent contractor, however, your ultimate goal should be to reach three to six months of your average monthly income rather than just your living expenses. If you’re saving just for the expenses you can’t cut, like rent/mortgage, utilities, groceries, etc., you’ll feel stressed and limited if an emergency actually strikes. Plus, you’ll likely deplete your reserves fast, causing more stress and uncertainty. But if you save to cover your average income in the event of a hardship, you’ll have a cushion to get you through.

Step 1: Get the emergency fund established and do what it takes to fill it with $1,000.

Step 2: Save three months of non-negotiable expenses. Tally up your monthly bills, minus any extras that you could cut, and multiply by three.

Step 3: Once you’ve reached the expenses goal, save for three months of your income. Take last year’s total income and divide by twelve to get the average. Multiply by three. That’s your new emergency fund goal.

Step 4: If you’ve got a lot of credit card debt, now’s the time to temporarily stop building the EF and work to get the bulk of that debt off your financial plate.

Step 5: Aim for stashing six months of cash to cover nonnegotiable living expenses in your emergency fund.

Step 6: Finally, build your fund to cover six months of your average income.

Tactics for flooding that emergency fund fast

  1. Small weekly auto transfers from checking to savings: Set up for a small amount of cash to be moved to your emergency fund each week. If you’re transferring $25 on Friday, for example, you’ll save about $100 per month, and you likely won’t notice the hit to your checking account.
  2. Roundups:Many banks now offer a “roundup” service, like Bank of America’s Keep the Change, or you can find an app like Chime or Qapital to do this for you. Roundups help you save by rounding up your purchases to the nearest dollar amount and depositing the spare change into your savings. For example, if that smoothie and salad you had at lunch runs you $11.15, and you pay with your debit card, the system will place $0.85 into your savings. Some services allow the option of double roundups, meaning the amount would be $1.70. Roundups are a sneaky way to drive your emergency fund growth since you’ll hardly notice the spare change gone from your budget.
  3. Save a percentage of each check: Designate a portion, like 10%, of each paycheck to your emergency fund. Make the transfer as soon as you make the deposit. Or you can set rules within an app like Chime to do this for you.
  4. Dedicate a check: Maybe you have one client or one gig each month that always pays a small, but consistent amount, like $150. Dedicate that check as the one you always deposit into your emergency fund.
  5. Micro investing: Micro investing uses the concept of roundups for saving but takes the idea a step further by investing your spare change so that you can watch it grow. An app like Acorns does the whole process for you. Even though your money will be in an investment account, you can still access it quickly. But please note that, as with any investment strategy, micro investing does present a risk.
  6. Use multiple strategies: You can combine several or all of the tactics above to build your emergency fund. Putting your entire EF in investments isn’t necessarily wise, so use micro investing as just one strategy. Meanwhile, save a percentage of all of your paychecks in a savings account. Before you know it, you’ll have a good safety net.