An emergency fund is an associate account accustomed put aside funds required in the event of a private money, like the loss of employment, an essential health problem. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses.
In the current generation lot of people are thinking about an emergency fund, which is a good sign. Emergency funds are a key fund of a healthy personal finance.
Most of the financial advisors tell you to keep three months of your monthly expenses as an emergency fund. I would say it has to be at least six months. Trust me, it’s not that hard as it sounds.
Let’s understand why an emergency fund?
An emergency fund is a cash that you’ve saved up for the sole purpose of helping you maintain your normal life through the emergencies that suddenly arise. The thumb rule here is not to touch this cash until you really have to. Having an emergency fund means you have room to breathe in difficult time. It saves you from being panic if you lose a job. You might think to live on a credit card or borrowing from a friend or relative. This just gives you some time but in the end, you have to pay that money back.
A problem with the people is, they know that there a cash stored somewhere so the person is tempted to use it for the things which actually not an emergency. The cash is strictly for an emergency and should not be used for other expenses. An emergency fund should be easily accessible as and when needed. Don’t expect a higher return on such funds as the whole purpose of the fund is not generating high returns but to safeguard against any contingency. There are three ingredients of emergency fund i.e.
a) Low-risk b) Liquidity c) Accessibility.
Check steps below to build your emergency fund.
- Start slow but steadily
So, what’s the first step? Many people set a very high goal for their emergency fund right in the beginning, that it’s very hard to get there. Six month’s living expense is a huge amount and might take about a year to achieve that, for some, it might take more than that. Instead, start with the reasonable amount. Say 10000 bucks, which you can achieve within few months. Now break this goal further into months and weeks. If you save 500 bucks a week that is 2000 a month and require five months to reach your first goal of 10000 bucks.
My advice is to not set your savings plan too high at first, either in terms of the amount you can save each week or the overall amount. It should challenge you just a bit, but not be a number that’s simply unreachable.
- Find a way
There are a lot of ways to come up with extra money throughout the month. Once you start thinking in that direction I am sure you will find a way to save for your weekly target. cut back on the cost which is not required. Scan through the house I am sure you will find a way to cut the cost in some corner of your house. Purchase groceries in bulk or at the supermarket. Use carpool to go to the office. Stop renewing magazine subscription which you are not reading at all. Use energy-efficient equipment to save on your energy bill.
The key thing here is to actually save these savings. Instead of just spending the money on something else, put that money away towards your emergency fund.
- Invest it
So, you have saved some bucks, next action is to put it into a liquid fund which has all the ingredients mentioned above. This way you will be able to generate a reasonable return and since money is not with you, you will not be tempted to use it. I recommend to set up an automatic transfer of fund from your bank account into this emergency fund.
- Treat it as a bill
Establish a monthly saving goal and make it a part of your monthly budget. Consider it as a regular bill like your electricity bill. This forced saving should feel like a “bill payment” every month.
- It is for Emergency ONLY
Obviously, when you do have an emergency, you are tempted to use it for other expenses which are not required at that point in time. Control your emotion and impulsive buying. Always remember this fund is strictly for an emergency. Don’t you dare to touch it except for extreme condition?
Read also: Ways you can save money to reach your goals
Believe me, it’s not that hard as now you know this hacks. apply these simple yet effective ways to build your emergency fund – and you’ll sleep a lot better at night knowing that.