In this article, I will share with you a few tips on how to start an emergency fund in easy steps.
You don’t have to go into debt to cover expenses or become overwhelmed by the thought of building an emergency fund in the event that the unexpected strikes.
No one knows when an emergency might arise. It might be a car accident, sudden death or disability in the family, or loss of job. Whatever the case, emergencies always seem to happen at the worst possible times. That’s why it’s important to have an emergency fund – money you can quickly get access to when an unexpected twist of events arises.
So, what is an Emergency Fund?
An emergency fund is an important aspect of a solid financial plan.
An emergency fund is a savings account set aside for unexpected expenses such as medical bills or car repairs, job loss, or home repairs.
Having an emergency fund can help you reduce financial stress resulting from job loss or extended illness and provide peace of mind knowing that you have money when an unexpected expense occurs.
While there is no definite amount on how much you should save in an emergency fund, a lot of experts often recommend setting aside a stash of cash that can cover three to six months of living expenses.
Building an emergency fund can be a daunting task but it is important to know that you are prepared when the inevitable happens.
Here are a few tips that might make building your emergency fund easier
1. Determine how much you need to save and budget.
Make a choice to start an emergency fund and determine how much you need to save in your emergency fund.
A rule of thumb could be saving three to six months’ worth of living expenses. This will ensure that you cover your essential needs if you experience any financial constraints.
You can also make a budget to determine how much you need to save on your monthly costs like housing, food, transportation, and other necessities and then multiply the sum by six, which gives you the amount you need to cover six months of expenses.
2. Set monthly saving goals
The next step is to determine your emergency fund goal. This will help you determine how much you need to save each month in your emergency fund in order to reach your target.
Setting a monthly saving goal can help you keep on track and remain motivated when you experience hurdles along the way.
3. Automate your savings
One of the excellent ways to save for an emergency fund is to set up direct deposits. With direct deposits, you can set up a recurring transfer of your salary and other funds directly into your checking account and savings account each month eliminating the need to manually deposit by yourself.
You can also set up a split direct deposit that allows you to direct a specific amount of money in your emergency fund and the balance going to your checking account or vice versa.
This will simplify your saving, and ensure that you’re saving regularly and that your emergency fund grows steadily while keeping track of your progress.
4. Gradually increase your savings
Once you have set a direct deposit to your savings account, you can then gradually increase your monthly contribution to your emergency fund until you reach your savings goal.
One way to do that is by allocating a portion of your salary to your emergency fund as soon as you receive a raise at work before you have a chance to miss it.
You may also need to consider setting aside some extra money in your emergency fund for specific purposes like a car repair or medical expenses.
5. Save unexpected Cash
Unexpected cash can be in form of cash gifts, inheritance, bonuses, winning a contest, lottery, or tax refund.
Spending such money on things you want can be so tempting however it’s an excellent opportunity to give a boost to your emergency fund.
Considering putting at least part of the unexpected money into your savings account can cover unexpected expenses in the long run.
6. Keep saving after reaching your goal
A lot of people often make the mistake of stopping to save in their emergency fund once they reach their goal and get lured with a sense of financial security and letting spending creep up again.
However, you know from experience that emergencies can crop up at any time.
It’s crucial that you continue saving. If you’re forced to dip into your emergency fund for an unexpected expense, start rebuilding the account again as soon as you can.
Setup a separate saving account for your emergency fund so that you’re not tempted to spend money on other things and put money back into the account after your next paycheck so that you will be prepared for the next unexpected event.
7. Pay off debt as quickly as possible
In order to have a constant contribution to your emergency fund, you need to get rid of debt as soon as possible. Once you pay off debts such as car loans and credit cards, you will have more income to contribute to building your emergency fund.
Also paying off your debts more quickly will help you avoid accumulating more money in interest.
8. Review and adjust your plan as required
As your life changes, so do your emergency fund. Be sure to periodically review your plans and make adjustments where possible.
For example, if you experience a major setback such as job loss or a medical emergency, you may need to increase your savings so that you have enough to cover your unexpected expenses.
On the contrary, if you experience a significant increase in your income or promotion, you may be able to save more money each month or reduce the amount of money you keep in your emergency fund.
An emergency fund is the best way to save money for unplanned circumstances. It can eliminate the need to take on personal loans or credit card debt.
Emergencies can happen whether you’re prepared or not so being prepared is the best way to handle a potentially difficult situation.