This post is all about how to build an emergency fund.
An emergency such as unemployment, sickness, or natural disaster can strike when we least expect it.
Unfortunately, such events are not under your control, and you might face financial turmoil.
Thus, ensuring you have a backup plan to cushion your financial status is very integral.
When you build an emergency fund, you will conveniently meet your most essential needs and keep your finances afloat even in difficult situations.
What is an Emergency Fund?
An emergency fund is a particular account set aside with enough money to pay for unexpected expenses.
It helps you meet necessary and obligatory expenses without the need for emergency loans, selling your assets, or relying on credit cards.
According to financial experts, your emergency fund account should have enough money to cover obligatory expenses for three or six months. However, some expenses include the following essentials, such as:
- Medical expenses
- Basic house repairs and maintenance
- School fees
- Car fixes
How Much to Save for an Emergency Fund
The first step is to determine how much to save when you build an emergency fund by estimating your monthly expenditure.
In most house households, food, rent, and transportation eat up a significant amount of your income.
Therefore, remember budgeting is critical, and you should consider the following intrinsic steps:
- Classify your expenses into necessary (obligatory) and discretionary before you build an emergency fund.
- Record for several months so that you can average your monthly expenditure.
- You can cut off your spending by buying less expensive things, skipping luxurious and expensive dining options, or downgrading your car or phone
- Importantly, if you are the sole breadwinner in your home, ensure you save more money in your emergency fund.
Although the figures seem daunting, they are achievable with the appropriate financial planning and discipline.
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What Are The Benefits Of An Emergency Fund?
An emergency fund can help you settle debts-there are various financial bumps that an emergency fund can help avoid. First, the fund will help you cover debts and prevent you from adding more debt.
Cushion you after the unexpected loss of a job or medical illness: it ensures you have a financial buffer and avoid the negative impact of job loss or illness.
Cover emergency home or car repairs: the money can come in handy to make necessary repairs. Unexpected repairs such as ac repairs or plumbing repairs may happen when you least expect them.
It gives you peace of mind-the allocated funds will give you peace of mind even in the event of economic downturns. Moreover, the money will help you meet your obligatory expenses even after losing your job or after a job cut.
Download: Expense Tracker Sheets
Safeguards you from making a terrible financial decision: When an emergency strikes, you may opt to take high-interest loans or sell your assets, which negatively affects your financial position.
An emergency fund helps cushion you from making terrible financial decisions.
5 Tips To Build An Emergency Fund
Economic downturns are unpredictable and can lead to salary cuts and unemployment.
In addition, the recent coronavirus pandemic has taught us that disaster can strike at any time.
Thus, it is essential to start an emergency fund that acts as a financial buffer in such times.
The following tips will help you gain control of your finances.
- Have a Prescheduled Date
- Have a Minimum Monthly Figure
- Create a Savings Account
- Deposit Lump Sum Cash into your Emergency Fund
- Cut Down Your Expenses
1. Have A Prescheduled Date
Financial discipline is the first thing in getting your finances on the right track. Having financial goals helps reach the target faster and in a more subtle manner.
For example, you can kick off your journey by having a specific date you want your emergency fund set up.
Your goal can be in a couple of months or a year.
Download: Daily Planner Sheets
2. Have A Minimum Monthly Figure
Another practical method is having a minimum figure that goes to your emergency fund monthly.
You can, for instance, have a minimum monthly figure of $100, and be disciplined to ensure that your contributions don’t fall short of this figure.
You can also set up an auto-debit option where a portion of your salary is directly channeled to the emergency fund.
Download: Budget Sheets
3. Create a Savings Account
The best place to build an emergency fund is a high-interest savings account, which you can easily access.
Having straightforward access is intrinsic since an emergency can occur at any time.
However, you should ensure the savings account is separate from the other accounts so that you are not tempted to withdraw your reserves.
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4. Deposit Lump Sum Cash Into Your Emergency Fund
Lump-sum cash like bonuses or income tax refunds should be auto-directed to your emergency fund.
The saving strategy ensures you meet your financial goal more straightforwardly.
You can also deposit money after the sale of your asset, such as a car.
5. Cut Down Your Expenses
Cutting down on non-essential expenses helps to reach your financial goals faster and increase your monthly contribution.
For example, you can opt to forego luxurious and expensive things such as dining in high-end hotels or buying luxurious cars.
Of course, it does not mean that you should entirely cut off your high-end life, but you should limit yourself.
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How To Manage Your Emergency Fund
It would be best to have a practical plan to save your money and deploy it correctly and securely. When managing you’re your funds, you should consider the following crucial factors:
Security – the funds must be stored in non-risky saving options.
Ensure you don’t start an emergency fund in accounts or savings options at risk of closure or capital erosion.
Avoid things such as equity mutual funds since they carry high risk.
Accessibility-you should have timely access to your funds when emergencies strike. Invest in convenient accounts.
Liquidity: how quickly can you turn your investments into cash?
Ensure you start an emergency fund that can be quickly liquefied.
An emergency fund is integral for every household and should be your most essential savings priority.
Ensure you determine your necessary expenses and try to cut down on your non-critical wants when you build an emergency fund.
The first step is allocating monthly funds into a savings account. You should also check if your employer offers automatic salary deductions that go directly to your emergency savings.
When you start an emergency fund, the rule of thumb is to have enough money that can cover three to six months of obligatory expenses.