The future is full of unknowns and many things can happen to us that are beyond our control. That also extends to our finances, so it’s wise to have an emergency fund to help cover unexpected expenses.
Are you prepared if you lose your job or get sick? What would you do in a natural disaster? If your car or household appliances break down, can you fix or replace them?
An emergency fund is an answer to all of these questions. But how do you get started from scratch? Our four tips will help …
To successfully build your emergency fund you need to make it a priority. It’s all too easy to skip putting money aside one week because you tell yourself that the likelihood of an emergency is low, but it’s that mentality that will leave you stranded when one occurs.
Choose a set amount to put aside and treat it as a necessity like the electric bill or paying rent. You could even set up an automated bank transfer from your checking account to a savings account so you stay committed.
Another trick is to formulate a budget that excludes your emergency savings from income. If you pretend you never had $20 every week, you won’t miss it. And such a small sum will grow to over $1,000 in one year!
You can’t save efficiently without having a firm understanding of your finances. That’s why it’s so important to budget, and it really isn’t that difficult to do. Whether you use an app or a good old-fashioned pen and pad, note down all the money you have coming in each month and all the expenses you have going out.
This should include your salary or wages and any other regular income, and all the regular expenses such as your mortgage, rent, utilities, car payments etc. It is also wise to estimate more sporadic income and expenses (you an average this out if you keep track over several months). For example, going out to the movies and buying new clothing.
With your budget clear, you now know exactly how much money you have left over each month and can choose a realistic amount to put aside for emergencies.
3) Set the size of your Fund
Ideally, your emergency fund should be able to cover your basic living expenses for three to six months. This gives you plenty of time to find a new job if you lose it, get your health in order if it takes you out of work, and re-settle in the case of a natural disaster.
The pot will also be big enough to cover other emergency expenses that don’t directly impact your income or home situation.
Of course, everyone’s situation is different and you may have a particularly high and stable income, home equity, and a great credit rating – all of which decrease your odds of a financial emergency. In that case, you may set a lower amount for your emergency fund.
On the flipside, if you’re renting, just starting out in your career or do not have stable work, and you have poor credit or are nearing your credit limits, then it’s wise to build a larger emergency fund to fall back on.
Note: Your fund should always be full, so if you tap into it, remember to start saving again. You might even choose to jump ahead of your savings schedule by using guides like ‘how to make 500 dollars fast,’ to give your fund a quick refill.
4) Make it Work for You
Having some cash on hand is always a good idea for emergencies, but you don’t want the bulk of your fund under the mattress. The best option is a savings account that gives you full access at any time. This way you will earn some interest to make saving easier and you’ll still be able to withdraw as much as you need at any time during an emergency.
You may decide to put a percentage of your fund in a less liquid account, such as a mutual fund or even physical precious metals like gold and silver. Diversifying is always wise (bank collapses do happen), but you want the bulk of your fund accessible on the day you need it.
By following this simple advice, you will be able to create an accessible insurance policy to protect you and your family from any and all financial emergencies.