An emergency fund is a cash reserve that assists families in medical situations, job loss, home repairs, car repairs, unexpected salary cuts, or long-term situations such as war, pandemic, illness, etc. These funds can be used for large or small bills that are not part of regular or monthly expenditures. These funds are used in need instead of credit cards or loans.
The amount of the emergency fund is determined by income and expenses. To avoid debt and borrowing, the general rule is to keep 3-5 months’ worth of expenses in an emergency fund. You must save more if you are the sole earner in your household.
As a result, one should always keep their emergency fund separate from their bank account. Otherwise, one may be tempted to spend the funds on non-emergency expenses.
Five Steps For Building An Emergency Fund
An emergency, like any natural disaster, can strike at any time, and there is nothing anyone can do if they are not prepared. At such times, it is critical to have enough funds to bring the situation under control.
Follow some of these essential steps to create an emergency fund that can be used in times of need.
Check Your Budget:
The most important step in creating an emergency fund is to review the budget. When you don’t know your monthly budget, saving money is difficult. Always keep track of your monthly expenditures and compare them to your salary. You gain a better understanding of how much money needs to be saved. As a result, you can improve your financial health by cutting back on unnecessary expenses.
Determine Your Goal:
The second essential step is to establish a goal from the start. It is unnecessary to immediately put a large sum of money into your emergency fund. Instead, begin with small contributions and ensure consistency. Set a common goal for the first few months, then gradually increase your contributions. As a result, you will remain committed to your goal and feel motivated.
Decrease Your Expenses:
Another important step is to keep track of your expenses daily. Please keep track of unnecessary expenses and brainstorm ways to eliminate them while reviewing your expenses. Don’t get new credit cards, and keep encouraging yourself at all times while sticking to your goal.
Do Not Over-Save:
Saving is crucial, but over-saving is not. If you believe that over saving will help you save more, this can also have a negative impact. If you continue to save more than your limit, you will go into debt and have to take out loans. It will eventually impact your financial health and deplete your emergency funds.
Automate Your Savings:
This is one of the simplest methods to track your emergency funds. Open a separate bank account to keep all of your savings in one place. Then, choose cash incentives from banks and put the extra money into your emergency fund. By going digital, one can save a lot of money.
Conclusion:
Saving money is insufficient for establishing an emergency fund. You must plan carefully so that the money does not decrease but grows over time. It’s critical to make sure your emergency fund is safe, accessible, and liquid. If you keep your savings safe and secure from deployment, you can use them during times of capital erosion. Another critical factor is having timely access to your emergency fund in the case of an emergency; otherwise, it is useless. Finally, ensure that your fund can be easily converted to cash. Long-term deposits, bonds, and Provident Funds should be avoided because they are irredeemable before maturity and charge high withdrawal fees.
References:
Mymoneycoach, D.E.B.R.A.P.A.N.G.E.S.T.U. . 7 Steps to Saving Money in an Emergency Fund. . What are the essential steps for building an emergency fund?. [Online]. [21 September 2022]. Available from: https://www.mymoneycoach.ca/blog/saving-emergency-fund.html