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Ever been smacked with a bill out of the blue and thought, “Bloody hell, what am I going to do now?” as you looked at your empty bank account?
I mean, what other options do we have besides taking out personal loans or using our credit cards to cover this time?
“What if I’m hit with another unexpected expense?”
And you’re right to think that. If it happens once, it can happen again.
This is where an emergency fund comes into play.
What Is an Emergency Fund
As its name implies, an emergency fund is a fund set aside explicitly for life’s unexpected events.
It’s a dedicated amount you contribute regularly, separate from your other savings. You can quickly access it without incurring a penalty, and it can be used for emergency expenses that life invariably throws your way.
It is always kept readily available, offering immediate relief to you without the need to incur any debts.
Why Do You Need an Emergency Fund
Uncertainties are a part of life’s package deal.
With an emergency fund, you’re not left scrambling when the car suddenly needs a repair, loss of job and income, or an unexpected medical expense. It’s the difference between a short setback and a potential downward spiral into debt.
In short, it’s your self-funded “insurance policy.”
How Much Should You Save Up for an Emergency Fund
The general advice is to aim for 3 to 6 months of living expenses, but do consider your unique situation before you calculate your emergency fund:
- Income: A fluctuating income means a larger emergency fund will be necessary.
- Expenses: Take note of your essentials, such as rent, utilities, and groceries.
- Dependents: You’ll need more if you have a big family.
The idea is to build a financial cushion that can sustain you without drastic changes to your lifestyle.
How to Build Your Emergency Fund
1. Create a Budget & Give Purpose to Your Money
A budget gives you a clear picture of where your money is going and where you can save more.
Here’s how to effectively budget money for your emergency fund:
- Understand Your Cash Flow: Start by listing your income and all your expenses.
- Prioritize Your Spending: Once you understand your cash flow, prioritize essential expenses. Ensure you meet your basic needs first, then allocate funds to your emergency fund.
- Give Purpose to Each Dollar: Adopt the mindset that every dollar you earn has a specific job. Whether it’s for bills, savings, or entertainment, consciously decide where your money should go. This helps prevent mindless spending.
- Review and Adjust Regularly: As your situation changes, so should your budget. Regular reviews will help you adjust your allocations.
Creating a budget and assigning purpose to your money helps you prepare for unexpected expenses, track your progress, and achieve your financial goals.
Now that you have a budget in place, let’s look at setting achievable savings goals.
2. Realistic Savings Goals
Setting an achievable emergency fund is crucial in ensuring steady progress without overwhelming yourself.
Here’s how to do it:
- Use the SMART Goal-setting Method
Let’s say you want to save $6,000 (Specific) of emergency funds in case of an unexpected emergency expense(Relevant) in 12 months(Time-Bound).
That’ll be $500 savings per month(Measurable).
Based on your newly created budget, is this possible(Achievable)? If yes, go for it.
Setting a realistic saving goal creates a practical path toward building your emergency fund.
3. Automate Your Savings
Automating transfers on your paydays ensures that a portion of your income consistently goes toward your emergency fund before you can touch it.
This removes the temptation to spend what you intend to save and ensures you steadily progress toward your goal.
4. Reduce Non-essential Spending
Freeing up more money for your emergency fund starts with a closer look at your spending habits.
Here are some common areas where you will find opportunities to cut back on:
- Dining Out: Opt for home-cooked meals more often, which can be healthier and more cost-effective.
- Subscription Services: If there are any you rarely use or there are cheaper or free alternatives, cancel them.
- Online Shopping: Wait for a day or two before making the purchase to see if you still consider it necessary. Alternatively, stop shopping for a while until you hit your goal.
These small but significant changes in your spending habits can add up, boosting your savings over time.
5. Increase Your Income Streams
Many of us have recently felt the pain of rising living costs, as our wages haven’t kept up with them.
There’s a limit to how much we can cut our expenses and save. So, the next best course of action is to increase our income.
Here’s how you can get started:
- Part-time Job Opportunities: Consider opportunities that align with your schedule, such as evening or weekend online tutoring, food delivery, or virtual assistant positions.
- Selling Unused Items: Look around your home for items you no longer need. Use platforms like eBay, Craigslist, or Facebook Marketplace. Take clear photographs, write detailed descriptions, and price items reasonably to attract buyers.
- Freelancing: Use your skills to earn extra money. Websites like Upwork or Fiverr can be great starting points for freelance work. If you have a hobby or skill such as graphic design, writing, or crafting, turn it into a side hustle.
However, do be aware of the tax implications of your additional income.
Keep records of your earnings and consult with a tax professional to ensure compliance and understanding of your responsibilities so you don’t get into trouble.
Where to Keep Your Emergency Fund
The purpose of an emergency fund is to provide financial support during unexpected events.
It is similar to a life jacket during an emergency. It should be easily accessible so you can quickly use it when necessary.
Here’s where you can keep your emergency fund:
- Savings Account
- Money Market Accounts
- High-Yield Savings Account
Now that you know the best places to keep your emergency fund secure and accessible, let’s explore when you should use it.
When to Use Your Emergency Fund
An emergency fund is strictly for significant, unexpected emergencies.
True financial emergencies are sudden, urgent, and unavoidable situations that significantly impact your finances and lifestyle. These can range from losing your job to sudden car repairs or unexpected medical bills. These situations require an immediate financial response and can’t be postponed or paid for without dipping into your emergency fund.
Its purpose is to act as a critical financial buffer and protect you from resorting to high-interest debts in times of crisis.
Secure Tomorrow Today
An emergency fund is like an insurance policy.
In an emergency, it is there for you to dip into and resolve the issue. It gives you peace of mind, so you don’t have to worry about something unexpected messing up your life. Also, it protects you from falling into a vulnerable position and resorting to high-interest debts to resolve the problem.
So, get going now and make it happen!
