An emergency fund should be an essential component of every person’s financial plan. Unexpected tragedies can catch us by surprise, and an emergency fund can oftentimes be the difference between having a much-needed peace of mind and security or struggling to recover.
As the name suggests, an emergency fund is a separate account to be used only in the case of true emergencies such as medical bills or car and home repairs. While there isn’t a fixed amount to how much you should keep in your emergency fund but having between three to six months’ worth of your income is a good goal to have especially if you keep the most costly emergency, unemployment, in mind.
Steps in building an emergency fund
Set your initial target low
It can take some time to save even a single month’s worth of expenses and setting a target that’s too high and may demotivate you along the way. You could start with a target of saving $500. Depending on your income, you can achieve this in 3 to 4 months without it affecting your lifestyle in a big way.
Set a monthly goal
Now that you’ve set a goal, break up that goal into smaller and feasible monthly deposits. This way, you not only get into the habit of saving, but it makes the task a lot less intimidating.
Separate accounts
Remember that you should use a separate account from your emergency fund so that you’re unlikely to get tempted to spend that money. It’s important to leave the emergency fund alone until you really need it.
Make it automatic
You’ve already done the math and know how much you can afford to put in your emergency fund monthly, now make this task easier by having this amount automatically transferred from your checking account to your savings account. Another option is to have your bank automatically deposit a fixed amount into your savings account every time your salary rolls around.
Trim your expenses
Just because you spend $2000 a month, it doesn’t mean that it would take that much to survive. You’ll find that your critical expenses are much lower than your current spending if you take entertainment and dining out into account.
Chances are, you’re paying for multiple subscriptions like Netflix, Spotify and gym memberships. It’s time to cancel any subscriptions that you don’t use regularly and ones where you’re not getting your money’s worth.
If you don’t have an emergency fund, start building one today. Open a savings account and make your first deposit. Cut your expenses, save “found” money and prioritise saving to build your emergency fund as fast as possible.
