As children we were taught that ‘precaution is better than cure’. In the world of financial management, this saying has an especially important implication. Though you can never be prepared enough, you can always have a comfortable cushion to fall back on in the worst of scenarios, if you have an emergency fund.
If I have healthy savings and investments, do I still need an emergency fund?
Yes you do!
Unlike your savings or investments, your emergency fund is something you leave untouched and it is easily accessible to you. An emergency fund is meant to provide you financial security in unforeseen circumstances without resorting to last-minute, expensive loans. Building an emergency fund doesn’t require much apart from a little foresight and some dedication. In fact, earlier we’ve even discussed how you can build your emergency fund in 30 days or less.
But today, we’ll discuss a few quick tips to help you build your emergency fund.
- How much do you need?
To start saving towards your fund, you need to first ascertain how much money you should have. A good rule to follow as per financial experts is to set aside 6 months of your basic expenses towards an emergency fund. However, if you feel that is too big a task, start by working towards a 3 month target and then build that out further.
- Monthly saving budget
The most important step for creating an emergency fund is to set a savings goal. Analyse your current financial situation and estimate an amount that will be feasible to save monthly. You can then start allocating that money towards your emergency fund and before you know it, you’ll have reached your goal.
- Trim expenses
This is a no brainer. If you are living from paycheck to paycheck then it becomes difficult to keep extra money on the side. In this situation, you can trim all your extra expenses and put it towards the emergency fund account. All your magazine subscriptions, app purchases, etc can save you thousands annually.
- Save tax refunds
If you are among the lucky ones to receive tax refunds instead of having to pay additional taxes, set the entire refunded amount towards your emergency fund. Remember, creating an emergency fund is not a lifelong process. If you are diligent with your savings, you can enjoy a vacation and party later with that refund money. Securing yourself financially should always be your first target.
- Start small
You don’t need to stash an uncomfortably large amount every month and create a fund ASAP. That will stretch your monthly finances too thin and put you in a tight spot.
Instead, you can start small, with more achievable targets. You can even start with a piggy bank or keep a cookie jar as your target to fill up with money. Put in the change you have left over at the end of every night in there (on some days, you can even chip in a larger note). Do this until the piggy bank or cookie jar is full and put that money in your emergency account!
- Be diligent and dedicated
One of the most important aspects of saving for something is to be diligent about it. If you want to save for a rainy day fund, then ‘save now and play later’ should be your motto. A simple trick to stay on track is to have separate bank accounts for your savings and emergency funds, in order to eliminate the temptation of spending.
Remember it’s better to be safe than sorry. Imagine all the situations that can go wrong and keep on building your emergency fund. The future you will thank you!