How to build and emergency fund
MONEY MANAGEMENT,  PERSONAL FINANCE

How To Build An Emergency Fund: Why You Need One & How To Fund It

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Do you always run to the bank, ask from family whenever you have a financial emergency? Having an emergency fund is crucial and should be part of everyone’s overall financial plans.

Everyone faces some emergency during their lifespan. An emergency fund might usually be used for large or minor unplanned expenses.

Furthermore, whether you need some money to fund a project at the company or make an emergency trip to your doctor or the car mechanic, an emergency fund can help you in challenging times.

Always establish an emergency saving where you maintain the funds only for financial emergencies. This will help ensure you have a financial headrest the next time you need it.

Before getting on with the extensive details of the starting emergency fund, let’s start with some basics.

What is an emergency fund?

An amount of cash that you have set aside to be used only in emergencies is called an emergency fund.

It provides you with great peace of mind as you will know that you have some extra cash in your hand in case of an emergency.

Emergency fund

 A financial emergency is a highly stressful situation that no one wants to get into, but life happens, and it can happen to anyone.

It is important to note that an emergency fund is very different from a sinking fund. An emergency fund is used when you are facing unpredictable life circumstances.

On the other hand, a sinking fund is formed for scheduled events such, college tuition, vacations, tours, routine care, house maintenance, and other expected circumstances.

When should you use your emergency fund?

An emergency fund should only be used in case of real emergencies such as:

  • Losing your job unexpectedly.
  • Medical and health emergency.
  • Car repairs.
  • House repairs.

It would help if you never used your emergency savings to buy clothes or an upgraded car because they are not real emergencies.

Furthermore, only tap on your emergency funds for expenses directly related to an emergency. 
It is of utmost importance that you keep the purpose of emergency funds clear in your mind.

How much emergency fund savings should you have?

There is no specific amount of money you should have in your emergency fund. It varies from person to person and living conditions.

It’s advisable to have 3 to 6 months’ worth of expenses in your emergency savings account.

Depending on your monthly bills, family size, family needs, job stability, and other factors, your amount may vary.

For example, a person with a low-paying job can start an emergency fund with less money and keep adding to it every month.

Generally, experts recommend having at least $1,000 in an emergency fund. Your goal should be having at least 6 months of living expenses saved in the fund.

If you have an emergency fund that you can use to survive for the next 6 months of an economic crisis in these dire conditions.

More so, emergency funds would come in real handy for the people who have lost their jobs and need some money until they land the next job.

If not 6 months, you should have at least 3 months of living expenses in your emergency fund.

Keep in mind that basic living expenses vary from person to person because a lot of factors are involved in it.

Transportation costs, bills, rents, food, and every other essential expense impacts the living cost.

An easy way to look at it is that an emergency fund should be money for things that you must-have for your survival.

You can broaden the scope of your emergency fund depends on your savings and goals. With a good financial plan and goals, you can easily start an emergency fund.

What is meant by Living Expenses?

Living expenses mean the amount of money you need to live, for example, rent, utility bills, internet charges, insurance, groceries, and other essential expenses.

It does not include money for new clothes, additional subscriptions, entertainment charges, new equipment, toys, buying furniture, and unnecessary expenditure.

Moreso, living expenses also vary depending on the number of people you have in your households and how many are financially dependent on you.

Hence, you must spend a good amount of time determining your living expenses to ensure the accuracy of your future goals and calculations.

Where should you put the money?

Your emergency funds must be easily and quickly accessible. It is recommended that you store your funds in a place that will increase your money over time without any risk.

Furthermore, most banks and financial institutions offer investment schemes that allow you to increase your money.

Emergency funds are best kept in an interest-earning bank account, such as a money market or interest-earning account, without taxes or penalties.

Alternatively, a savings account is one of the best ways of keeping your emergency funds. It has a higher annual percentage yield and has minimal or zero charges.

How to create an emergency fund

1. Save Living Expenses for 1 Month

The goal of establishing an emergency fund is to have 6 months of living expenses set aside.

It may sound quite overwhelming, so it is better to divide this goal into smaller parts.

At first, you should save at least 1-month of living expenses. To make this step a success, you must carefully determine your expenses of 1 month.

The living expenses include all the necessary expenditures like power bills, mortgage/rent, internet, and insurance.

This would be the perfect time to develop and follow a specific budget for your living expenses.

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2. Pay Off Debt

Once you have accomplished the primary step of saving 1-month of living expenses, start paying off some debt like the interest loans taken for a property or credit card.

Most credit cards have a 20% interest rate, which means if you have credit card debt, a large portion of the money will be an interest payment.

You must pay off the high-interest debt as soon as possible to ensure you are saving some money from the interest payments.

3. Develop Emergency Fund Goal

With specific goals and objectives for your emergency fund, you will be much more excited and motivated to save money and develop an emergency fund.

They also make sure that you are making progress in terms of creating a fund. For instance, you can create the following goals:

  • 1: Save 1-month living expenses by July.
  • 2: Save 2-month living expenses by September.
  • 3: Save 6-month living expenses by February 2021.

Such goals should be written and kept insight to ensure you are making progress to achieve them.

Typically, people choose to put their different types of goals, including emergency saving goals, on their fridges.

Similarly, many new smart device applications allow people to write their aims, set reminders, and track progress towards these goals.

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4. Pay Debt and Save Money

After you have paid the high-interest credit card debt, you should start planning on paying off any other debt you might have.

Ideally, you should split the extra money into paying off debt and saving for the fund. It depends on what your living and financial situation are.

Usually, property loans, student loans, and mortgages should be prioritized. Keep your emergency fund goals in mind to make sure you are taking steps in the right direction.

Once you have achieved a degree of finical stability, dedicate a specific amount to the Emergency funds. Gradually, increase the overall amount.

5. Automatic Savings

To secure your financial future and save money for your emergency fund, you should automatically make your savings.

You should contact your bank to avail the feature of automatic savings and get details about the availability of automatic transfers.

Therefore, it is important to ensure that your savings are secured in the form of emergency savings instead of being carelessly spent.

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6. Earn Extra Income ( Side Hustle)

One of the reasons most people cannot save for emergency fund is not having enough money.

Also, making money is so much fun and there are so many ways to increase your monthly income.

Once you start earning extra money with side hustles, you realize the opportunities to make more money are endless.

Check out ways you can increase your income and save for emergency fund without stress.

Quick Tips for Creating an Emergency Fund

  • Develop a budget and strictly follow it.
  • Transfer all your savings into the emergency funds.
  • Keep reviewing your budget to ensure you are sticking to it. It will help you in maximizing your savings.
  • If you have no debt but the extra cash into your savings.
  • Review your emergency saving goals regularly to track your progress.
  • Keep in mind that an emergency fund should not be an optional thing in your life.

Conclusion

Countless unpredictable events can occur in one’s life. Losing a job, experiencing an income cut, medical emergency, and struggling to pay your bills are some of the reasons you need emergency savings.

The unemployment rate has reached an alarming rate. People who have emergency funds will be able to manage thing s, depending on their emergency fund size.

Hence, creating an emergency fund is essential and vital.

An emergency fund should not be taken as an option. In a time of financial distress, one can take the shade of the emergency fund.

In a nutshell, make a clear plan for your emergency savings. It would provide you comfort and solace at one point in time.

Do you have an emergency fund? How much do you have saved? Let me know in the comment section.

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Guide to starting an emergency fund
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