Author: Edeh Kelechi
The pandemic showed us that emergencies can happen any time and that we have very little control over them. Your total financial well-being depends on having extra money set up for emergencies; experts advise having three to six months’ worth of spending in reserve.
In this article, I will explain what emergency funds are, and how to create one for yourself.
Let’s get started
What is an emergency fund?
An emergency fund is money saved in a bank account to assist you in paying for huge and unexpected expenses such as costly car repairs or hefty medical bills.
It might also be cash that helps you pay for necessities like food, medical treatment, or rent while you’re unemployed without having to take out loans, sell your assets, or overuse your credit card.
How to build your emergency fund?
The amount of money you’d need to save for an emergency fund might be intimidating, and even the most well-intentioned people may become discouraged.
However, you do not have to give up before you begin. With these steps, you can successfully build an emergency fund, even if you are starting from scratch.
1. Start Small
If you are building your emergency fund from scratch, you can set yourself up for success by setting smaller saving goals rather than large ones.
For example, instead of starting with three months worth of expenses, you can start with just one month or even two weeks. You need to ensure that your first goal is doable so you don’t get overwhelmed.
Setting small savings goals at first motivates you to set the next ones. And as time goes on, it will become a habit.
2. Take Stock of your Existing Assets
You may already have money in the form of assets that you may put into your emergency fund.
These could be monies in your savings account or fixed deposits you don’t intend to use for a specified purpose. You can put some of the money towards your emergency fund. Doing that would help you reach your goal faster.
3. Automate your Savings
The simplest method to save money is never touching it in the first place, hence the adage “out of sight, out of mind.” Most employers offer direct deposit, and some even pay into multiple accounts.
As a result, you can open a separate account for your emergency fund and designate a specific amount to be transferred automatically monthly, either by your bank or your job.
Also, select an account type that is easy to access. Avoid regularly monitoring the account balance since this will make the funds appear smaller and slower, which may discourage you.
4. Avoid Over-Saving
While having an emergency fund is essential, you don’t have to devote too much of your resources. That is why establishing a target for your fund is critical.
Ideally, you should have enough money to last at least six months. Once you’ve met your goal, you can start saving for other things like retirement.
Another suggestion is to put your emergency fund in a savings account that is convenient to access and pays a high-interest rate.
Conclusion
An emergency can occur at any time in your life, whether related to healthcare or unemployment, and you must prepare for it. In these cases, an emergency fund serves as a safety net. Set a target for your fund – at the very least, enough money to keep you afloat for three to six months to avoid over saving. Also, remember to start small.
