Financial health should be up there alongside physical health in terms of importance and shouldn’t be an afterthought. After all, living entails expenses. No matter how excellent you are with planning where the available resources go, there will always be expenses you can’t account for proactively. That’s where an emergency fund comes in, which should be a vital component of your financial plans.
An emergency fund is a cash reserve specifically allotted for emergencies. As they say, the tough get going when the going gets tough.
However, you can’t toughen up without a financial safety net. That’s what will give you all the confidence you need to keep trudging on no matter how challenging the situation gets.
Benefits of Keeping an Emergency Fund
To build an emergency fund for nothing, you don’t curb your spending habit. Instead, your efforts should offer benefits of real value to you. The following list emphasizes those benefits.
Spares you from impulse spending
It’s understandable when sometimes you feel like rewarding yourself after all your hard work. That reward might be as simple as a cup of your favorite coffee or something more expensive like a new smart TV.However, remember that regardless of how much you spend on these impulse purchases, they do add up eventually. Before you know it, you’ve spent the same amount you would need for, let’s say, a down payment for a new car to replace your old one that has prematurely retired.
With a savings account, which you don’t have quick access to, you won’t be tempted to give in to your buyer’s impulse only to succumb to buyer’s remorse.
It saves you from making bad financial decisions.
Here, bad financial decisions can mean borrowing. If you’re borrowing from your parents who don’t charge you exorbitant interest, fees, and penalties, that’s okay.
However, if you’re borrowing from a loan provider whose business relies on profiting off people’s mishandled finances, you’ll be at the losing end from the get-go.
With an emergency fund, you won’t need to borrow. Whatever emergency expense you have to take care of, you’re covered.
It gives you peace of mind.
It all boils down to this. You don’t want to work as hard as everyone else and still finds it difficult to sleep at night because you know that just one trip to the hospital for a semi-serious medical condition would mean you’ll have to remortgage your house. Yet, an emergency fund affords you the privilege of taking it easy.
How Much Do You Need in Your Emergency Fund?
The first step to determining how much you should funnel into an emergency fund is to look at your financial situation earnestly and objectively.
Not everyone can follow the same guidelines, given how finances differ from person to person. For example, it might be easier for someone earning a fixed monthly salary to allot a fixed amount to an emergency fund. But, on the contrary, someone getting paid by the hour might not find it that easy, especially if that person doesn’t work the same number of hours each week or each month.
However, to arrive at a rough estimate, you may start by pinpointing the most common unexpected expenses you’ve encountered. Then, anchor your goal to how much those expenses add up.
Meanwhile, follow what most financial experts recommend if you want a safe route. That is saving between three to six months’ worth of expenses. Feel free to aim higher if you’re financially capable of doing that.
Remember that while you want to save for the future, you don’t want to deprive yourself of the present altogether.
How to Build an Emergency Fund
It’s no rocket science, so don’t get intimidated by the idea of saving. You can do the following to build an emergency fund steadily.
- Budget – It all starts with this oft-neglected financial hack. When you budget, you’re less susceptible to spending on unnecessary expenses. As such, make it a habit to list down how much money you want to part ways every week. Use a budgeting app if you wish.
- Stick to a monthly savings goal – Based on your monthly income, come up with a monthly savings goal. Then, stick to it without fail. Remember that it takes consistency to form a habit.
- Automate savings account transfers – This won’t be done if you’re paid in cash or via paychecks. The alternative would be personally depositing money into a savings account. Meanwhile, if your income goes straight to your salary account, make sure to link that up to a savings account—Automate transfers so that you’ll have no chance of changing your mind.
- Put away unexpected earnings – Perhaps you get a tax refund every year. Instead of spending that money, deposit it in your emergency fund. If you went grocery shopping and ended up with a receipt smaller than what you had budgeted, consider that an unexpected earning to put away in your savings account.
- Look for other sources of income – If you still have some spare time, explore different ways to earn. For example, maybe you could apply for a part-time online job. Alternatively, you could start a small business from home. Then, deposit what you receive from these endeavors to your emergency fund.
- Adjust how much you save – Ideally, your career won’t be stagnant. Whenever you can, adjust your savings goal. Do not limit yourself to a fixed amount, especially if you’re earning more than when you started saving.
Wrapping It Up
Everyone should take financial planning seriously—and integral to that is maintaining an emergency fund that you don’t tap into unless necessary.
Whenever you get tempted to draw from your emergency fund for expenses you can delay or forget about altogether, such as spending on a new phone, remember why you started saving the money in the first place. It’s for the future and the many unwelcome surprises it brings. But, of course, you don’t want to get caught off guard by one of those surprises, so it’s best to stay prepared.