Given the uncertainty of today’s world, planning for the future is a must. However, preparing for unforeseen events may seem like an intimidating task, especially when you do not know where to begin. A good place to start is by building an emergency fund.
An emergency fund is a tangible form of security that can keep you afloat during unexpected circumstances. You can think of it as a buffer that will absorb the blows that any major crisis may bring. With an emergency fund, you do not have to live in fear about what the future holds.
Everyone’s emergency fund will differ, depending on their household. Single-income households may be better suited to have a six-month emergency fund, as with those who suffer from chronic health conditions. On the other hand, a three-month emergency fund should suffice for a dual-income household or those who have steadier jobs.
Regardless of the size of your safety net, your fund should be liquid. This assures that you can access it as soon as possible, should an emergency arise. To do this, you can opt for a money market or checking account that allows you to withdraw via debit card or write checks instantly. Some people also decide to stash their fund in a high-interest savings account.
Now that you have understood what an emergency fund is all about, allow us to walk you through some tips for building a fund of your own.
Creating a budget may be puzzling and arbitrary, so you can begin by reviewing your numbers. Sit down and go over your monthly expenses. Try to eliminate as many unnecessary expenses as possible. Sticking to the essentials will make it much easier to save when you need to.
After you have pared down your expenses and are more attuned to your financial situation, you can create a monthly goal that is feasible. This will help you stay in line at all times, and avoid superfluous expenses.
In the beginning, this may be difficult because of some adjustments you will have to make, but once you have gotten used to your new habit, saving incrementally will be a no brainer.
While it is important that your emergency fund be liquid, you should still create a safe distance so that you will not be tempted to touch it prematurely. You can open an account with a different bank compared to the one you normally transact and have accounts with.
To avoid skipping out on your monthly deposits, do yourself a favor and set up recurring and automatic transfers. This way, you may also feel less of a pinch as the money will be deducted before you even realize that it is gone.
Additionally, if you have extra money that comes in such as a bonus or a tax refund, transfer even a portion of this money to your emergency fund. Any amount can get you closer to your goal.
Once in a while, review your current saving scheme. You may be able to lessen the amounts deposited each month, or if you find yourself earning extra income, you can always put in a little more. Note that even if you have met your emergency fund’s goal, you should never stop saving especially if you have already dipped into it.
Alternatively, additional savings can go into investments so that you can grow your money.
Remember to draw distinctions between what qualifies as an emergency and what does not. If it is urgent, unexpected, and mandatory, you can likely classify this as an appropriate emergency expense. Although emergency funds may be daunting, your future self will thank you for it.
For more savings strategies, you can read our post on ‘How to Save Money For Your Future - Some Ways to Begin Saving.’