A Simple Guide to Emergency Fund

Life is full of surprises, whether good or bad. As much as we want it to be predictable and be prepared for whatever is coming towards us, in reality, it is impossible. An unexpected financial crisis can arise at any moment, and it will make our lives miserable if we don’t have a financial backup. Emergency up is your lifesaver during these critical times. In this guide, we will discuss everything you need to know about an emergency fund and how to build one.

What is an emergency fund?

An emergency fund is a pool of money you save for emergencies. It serves as a financial safety net and provides you peace of mind. Knowing that there is a financial backup stops you from worrying about money every day. It prevents you from borrowing high-interest debt during challenging periods that increases your financial burden later down the road. No matter how stable your life is right now, having an emergency fund is a must for unforeseen circumstances.

How much do I need

The more the merrier. It is recommended that emergency funds should be able to cover 3-6 months’ expenses, but you can go for 12 months for more security. When you set your goal, take the foreseeable future into consideration. For example, is the economy bad, inflation skyrocketing? It is important to review and update your budget every month and make sure that the emergency fund is able to cover your target expenses. The value your emergency fund may decrease in the coming month.

Where do I keep it?

An emergency fund should be readily be accessible at all times. You need to be able to use the fund when you need it, otherwise it loses its purpose. Building on top of that rule, you also need to maximize the potential benefits of this fund and minimize the opportunity cost. Therefore, consider a high-interest savings account as the first option, and do not put your funds into investments and assets that require long-term commitment. That being said, it is a good option to store part of the fund in cash so it can be assessed at any times.

Note: Make sure to check the maximum withdrawal and transfer limits for each bank, as these limits could impede your ability to access your emergency funds when needed most.

How do I start

For full and complete guide on how to save money, read this post “How to Save Money: 14 Tips that Work”

Create A Budget

Track your monthly expenses. If you don’t know how much and what you spend your money on, you won’t be able to create a comprehensive savings plan. Be accurate, note down every expense you make, and review how you can cut down your expenses and turn them into savings.

Create A Realistic Goal

Set a realistic goal and gradually increase the monthly saving amount. Start too aggressively from the beginning is likely to be unsustainable . Begin modestly with an achievable amount and gradually ramp it up. This approach will help you cultivate a habit of saving over time.

Figure out ways to save money

There are many ways you can potentially cut your expenses. Whether you can implement them depends on your situation, which is why reviewing your monthly expenses is important. As mentioned, don’t just start doing them all at one. Remember, begin at a comfortable pace and move your way up.

Create Automatic Savings

Schedule automatic transfer every month, or on payday to automatically transfer a portion of your income into your emergency fund. That way, you won’t overspend and exceed your budget.

When should you use it?

Set your own rule. Some people use it for medical purposes, home repairs, car repairs, or when they lose their job. However, determine when your emergency fund should be use and stick to the rule. It is recommend to use it only when absolutely necessary or as the final resort. It is important to know that it must not be used for entertainment, vacations, or shopping.

Bottom Line

An emergency fund can be a lifesaver during tough times. Begin building yours today, and you’ll thank yourself in the future. Though it may not be easy to set aside extra money, the effort will be invaluable when the need arises.

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