Read more
Building an Emergency Fund
An emergency fund can help protect you against financial emergencies that require high-interest personal loans or credit cards, like sudden illness, car repairs or home renovations. An emergency fund should always be considered part of your long-term planning strategy to be prepared in case sudden illness, car repairs or renovations arise at any point in time.
Saving up three to six months' of expenses is generally advised, making this goal easier to reach by cutting back on unnecessary spending and depositing any unexpected income into your savings account.
1. Cut Back on Unnecessary Expenses
An emergency fund gives you peace of mind in case unexpected expenses arise, and saving three to six months' living expenses in advance could prevent high-interest personal loans or credit card use from becoming necessary.
Consider how you can reduce unnecessary spending and set a savings goal that makes sense for your financial situation. While it may be challenging to transfer six months' expenses immediately into a savings account, setting smaller goals such as one or two weeks can help build momentum towards saving. Reaching these milestones will encourage further savings.
Regular reviews of your financial goals should also be undertaken. Should your job or family circumstances alter, additional savings might be required in order to keep up with expenses.
2. Establish a Monthly Savings Goal
An emergency fund can protect against unexpected expenses that might pop up unexpectedly, like home or car repairs, medical bills and job loss.
Experts advise aiming to have enough savings saved up for three to six months of expenses, though sole breadwinners, self-employed people or those with fluctuating incomes should aim higher.
No matter how much money you have saved, it's essential that you set an attainable savings goal and start right away. One effective method of doing so is setting up automatic deposits from your checking account into an individual savings account or money market account (which typically offers similar interest rates as savings accounts but provides checking features). Be wary of accounts where regular withdrawals take place as this could tempt you into spending the emergency funds prematurely.
3. Set Up Automatic Deposits
Financial experts generally advise establishing an emergency fund of three to six months of expenses as soon as possible. If this seems daunting, set smaller goals.
Consider automating your savings by setting up direct deposit with either your employer or bank to automatically deposit funds into an emergency savings account. Keep this account separate from other savings accounts you might hold and use it only when an unexpected expense arises.
Opening two accounts could also be beneficial: A high-yield savings account to maximize returns while protecting investments from risky fluctuations; and an emergency savings account - should any unexpected cash arrives such as tax refunds or bonuses, be sure to transfer some or all of it immediately into both.
4. Set Up a High-Yield Savings Account
Emergency funds should be stored in high-yield savings accounts for ease of access and to earn higher interest rates than certificates of deposit or money market funds.
When you receive financial windfalls like tax refunds or cash gifts for birthdays or holidays, consider allocating some or all of it towards your emergency savings account. By doing this, your emergency savings fund could grow faster without negatively affecting your budget.
Launch with small goals and gradually build to the amount you require. This method makes reaching your savings goals simpler while giving you momentum for continued progress. Be sure to monitor and adjust as necessary!
5. Keep Track of Your Spending
Maintaining an accurate picture of your spending can help ensure you achieve your savings goals on schedule. Consider using an app or online banking to automate this process so you don't have to think about it manually.
Utilizing a monthly spending calculator can also help identify areas in which you can reduce expenses and save more money. For instance, perhaps cutting back on cable bills or cancelling streaming services will free up funds for an emergency fund.
Unexpected money such as tax refunds, bonuses, cash gifts and inheritance can be an excellent way to quickly build an emergency fund. Be sure to put any unplanned income directly into your emergency fund rather than spending it on impulse purchases.
6. Get Creative with Your Savings
Finding enough money for an emergency fund may seem impossible when living paycheck to paycheck, but creative saving techniques can make the task simpler. If your budget allows, consider taking on side hustles such as selling items online or driving for ride-hailing companies to earn extra income and build your emergency savings faster.
As soon as you receive a source of cash - whether that be from tax refunds, gifts or otherwise - try to quickly set aside some for emergency savings. Doing this will allow easy access when unexpected expenses arise as well as deter you from using credit cards with additional interest costs that could linger over years.
7. Set a Goal for Your Future
Establishing an emergency fund is a must - it will protect against having to sell off long-term investments at fire sale prices, should something arise that requires them. While saving may seem impossible if living paycheck to paycheck is your reality, there are ways you can build up savings for an emergency without mortgaging your future.
General guidelines suggest saving at least three to six months' of expenses in an emergency account as a buffer in case your job or unexpected expenses arise.
Make it easier to reach your savings goal by setting up automatic transfers into an emergency savings account. This way, money will automatically arrive each month without interrupting your current spending plans or being visible - plus any financial windfalls like tax refunds or bonuses can help build it further.
0 Reviews