Unemployment, medical emergencies, unexpected car repairs, natural disasters, and a million other things could be the makings of a horror story in the life of an average working adult. However, do they really have to be?
Often, because of their unexpected nature, these emergencies are more than most people’s budgets can handle. Building an emergency fund is one of the best ways to cover, or at least reduce, their damage on your financial situation. The sooner you start tucking away money for a rainy day, the more secure you’ll feel facing future troubles.
What is it not?
The first thing to remember is that your emergency fund is not your savings. Yes, you do save money, but only specifically for emergencies. As a measure of success, your savings should still be intact after experiencing a financial emergency. A good way to start is with this equation: Income – Savings = Expenses. Prioritize your savings and find ways to trim expenses so you can build your emergency fund.
How much is it?
According to Reader’s Digest, In determining the amount of money you need for your emergency fund, a good rule of thumb is to find out how much three months living expenses would cost. This way, if you do become unemployed, you’ll have a buffer of at least three months for you to get back on your feet. Of course, you can opt to build a larger fund if you can.
Where should it be?
Since this money is for unexpected moments, it has to be in an accessible place. However, keeping a bag full of cash in the basement is still not a good idea since your fund could be earning interest in a savings
account instead. Find a high-yield savings account if you can. Make sure you don’t use the fund for things other than emergencies though. To really minimise the temptation, try getting a passbook instead of the usual ATM card.
How can I build it?
Since your emergency fund is separate from your retirement or savings, it sounds more difficult than it actually is. According to the Independent, even having an emergency fund of £500 can make a ton of difference when the need comes. You can set more realistic targets and just keep building your fund after reaching them.
Here are some ways to help you build your fund.
— Starting is often the most difficult part. You can start small by saving pocket change until they’re big enough to open a savings account. You can also do this using mobile savings apps if you prefer not to use cash.
— If there’s some money left after your expenses in a month, put it in your emergency fund.
— If there’s no money left after expenses, it’s time to re-evaluate the way you spend and figure out where you can trim costs. It may be the perfect time to learn more home-cooked meal recipes or have your film nights home instead of the cinema.
— Consider a new source of income. If you’re too exhausted for a second job, you may look for more laid-back freelance work online. If that still sounds too tedious, you can also explore e-commerce, even if it’s just to sell your old stuff.
Building an emergency fund is as much a responsibility as it is a necessity. You’ll be surprised by how a few pounds here and there can add eventually add up and give you the sense of security you didn’t know you could have.