How to start an emergency fund is a question that should be on everyone’s lips now (well, that’s if no one was bothering to know before), owing to the onslaught of the recent coronavirus pandemic
Having an emergency fund saved up can prevent you from sinking into debt. An emergency fund is that hedge you have over every unexpected occurrence.
Fires, earthquakes, hurricanes, sudden illnesses, job losses, pandemics (like the recent Covid-19), etc., are some of the emergencies that could have the unprepared individual scampering for funds and getting knee-deep into debt.
No one truly knows what the future holds. If we did, then occurrences like these wouldn’t have been emergencies, would it?
That is why it is crucial to start an emergency fund and be financially prepared to deal with whatever life throws at you, whether good or bad.
Read also: 7 Financial Lessons to Learn From Covid-19
The importance of starting an emergency fund cannot be overemphasized. The wonders it does to your finances when you are faced with an emergency is unparalleled. Think of it as a financial shock absorber for all the things life will throw at you. I take it that you know how shock absorbers work, right?
Okay, just checking.
Starting an emergency fund can be intimidating. Indeed, it takes an extra level of financial discipline to be able to put away several months’ worth of living expenses. There are even those who see it as wasted assets.
Follow these five simple steps to start an emergency fund and give yourself that proper financial hedge against unforeseen occurrences.
HOW TO START AN EMERGENCY FUND IN 5 STEPS
1. Determine The Right Amount to Save
The first step towards starting an emergency fund is to determine how much to save.
How much exactly is the right amount to have in your emergency fund? At what amount do you get to pat yourself on the back for a job well done?
The short answer to this is to save up about six months of your monthly expenses.
For the long answer, the right amount to save would depend totally on your financial circumstances. There are a lot of opinions out there about how much money is considered the right amount to save. But most financial experts agree that the right amount to keep should be able to cover about 4-6 months of your monthly expenses.
But why save so much for an emergency that may never come?
As long as you go through life, there are bound to be emergencies. The recent Covid-19 pandemic did not bring with it warning signs. It just happened. For instance, if you’re one of the thousands who were affected by the massive job losses all around the globe due to the pandemic, and you were not yet a subscriber to the emergency fund idea, then you may already be knee-deep in debt right now trying to stay afloat.
I mean, granted, the amount of money required to be put away for emergencies is certainly significant. Still, you have to understand that these are uncertain times, and anything can happen at any moment.
You may show up at work the next day and be told you no longer have a job. It may be another global crisis or even a sudden illness, and there’s never a good time for these things to happen.
Six months’ worth of expenses is an insignificant financial sacrifice to make if it ensures you stay afloat during trying times.
So to determine how much you should save, you’d need to take a look at your expenses for the last 30 days, that will help you figure out the amount of money it takes for you to live.
Of course, certain aspects of your expenses like dining out or cable bills can easily be eliminated during an emergency to help you further utilize the limited money you have with you.
2. Determine Where to Put Your Emergency Fund
The next step is to figure out the best way to save your emergency fund. An account that wouldn’t be too easy for you to access and yet, not be too difficult to get to when you do need it.
You should avoid putting your emergency savings into accounts where you’ll incur penalty fees when withdrawing it, like your 401(k) account.
Put your emergency fund in an account you won’t be tempted to touch when you need money for other expenses.
You can use an online wallet for this or a savings account without a debit card since you want it to remain fairly accessible, yet one which wouldn’t entice you to make unnecessary withdrawals.
Also, though investing is a good idea, you should never expose your savings in such a way that you stand a chance of losing it all.
3. Automate Your Savings
After you have chosen the best way to save your emergency fund, now is the time to automate your emergency savings.
So you want to have six months of your expenses saved up? You want to achieve this financial goal at all costs? Your best bet would be to start saving automatically to that account.
Find a way to make automatic deposits directly from your paycheck into your emergency savings account. One way to do this is to set up recurring transfers from your earnings directly to your savings account.
Also, ask your employer if they will accept multiple deposit accounts. If they will, present your emergency savings account alongside your checking. State what portion of your income should go into which.
When you have done this, you can then sit back and watch your emergency fund grow month after month till you reach your target.
4. Find Ways to Boost Your Income
If you have a stable income flow, then it becomes easier and faster to save for an emergency.
You can get an online side hustle that will help boost your income. Among the things to do online for money include:
- Affiliate Marketing
- Paid Surveys
- Tutoring Over Skype, etc.
If you’re on a tight budget, look for those expenses you could cut off to free up some more money. You can start by canceling monthly subscriptions, switching to less costly service providers, stopping the habit of eating out, or seeking out ways to have fun without spending much money.
5. Discipline Yourself – Know When and When Not to Touch Your Savings
In addition to knowing how to start an emergency fund, it is essential to be able to differentiate between situations that are emergencies and those that are not.
It can be tempting to use the huge amounts you have already saved up for other things, but this is where your financial discipline should come in.
You need to continually remind yourself that there’s a reason you have that fund saved up in the first place, and there’s no way you’ll touch it for any reason otherwise.
Read also: 10 Ways to Pay Off Debt Fast
Emergencies may not be the same for most people, but generally, events like sudden job loss, pandemics, earthquakes, fires, hurricanes, etc., are notable mentions. So keep your finances for when you find yourself in any of them.
Your emergency fund is your financial lifeline in times of emergencies. It will keep you afloat financially when all else fails.
If you have something saved up, that can mean the difference between staying alive comfortably or staying alive by going deep into debt.
So start now and save whatever you can. Remember, once you have spent money from your emergency fund, always replenish it to give yourself a better fighting chance when facing the next emergency.