Life is unexpected! So you’ll need to be prepared for any situation that arises. It could be a medical bill or a job loss. Sometimes it can be a small thing such as replacing a lost phone or car repair. In other words, it’s a life event that needs you to incorporate more cash into your budget. It can be tricky sometimes since you may not have planned for the extra expenditure and it can lead to debts. Here is where an emergency fund is essential because we need to save money for the unexpected.
You need first to understand what is an emergency fund. In a simple definition, an emergency fund is a sum of money that you decide to save for you to curb all the emergencies that may arise without affecting your normal life.
Let’s take a look at the way forward to setting up an emergency fund . Before that, you ought to ask yourself some questions.
- How Much Cash Should I Put in My Emergency Fund?
It’s recommended that you save enough money to cover at least six months’ worth of living expenditures. Why is that? In the case of an unexpected situation, this can stretch your time to handle the unexpected without going into difficulty hustles.
The expenditures are the spending of each month such as groceries, car loans, utilities, insurance, and other essentials. It should also include all the additional bills that are not monthly, but you incur once in a while and leisure activities expenses.
I would suggest you start saving for an emergency fund with an amount you’re comfortable with. Start slowly and later on you can increase the amount you save.
- Where to Save My Emergency Fund?
Earlier, I stated that life is unexpected. You’ll need to be prepared for any emergency that comes your way. The ideal way to control it is to have some access to liquid cash from just right loans. It’s always advisable to keep a small amount of money somewhere in your home. By doing so, you can easily access the funds needed to handle any minor emergencies.
A saving account is considered when you want to save a large emergency fund. It’s the best-recommended way to save your money because it’s safe, you don’t need to worry about someone stealing your savings, and it’s quick to access and withdraw without any difficulty. If you decide to save, make sure not to touch it. The best way to avoid the temptations of using all your savings is to save in a different saving account from the one you use on a daily basis.
Simple Steps to starting an emergency fund
- Set a monthly savings target. It can be daunting at first when you decide to save since you not sure if you’re capable or if you have the extra money to save. By settings targets, will put you on pace to savings regularly and with time it will become a habit. Start small and grow big.
- Keep the change. That small amount you have; be it $1 or $5 bills, try to save the little change you get after every purchase. Put up a jar where you can put the change and when its full you can transfer it into your account (savings).
- Automate your savings. It’s after you’re clear on the amount you want to save in a month. That amount can be automatically moved from your checking account to your preferred savings account. By doing so, you don’t need to keep on thinking every month on the amount to save. It reduces the temptations to use the money set aside for savings.
- Modify direct deposit. It’s another way to increase your savings. If you can save money before you receive your paycheck, then you can just be depositing directly into your saving account. Also, you can save your tax refund which can be deposited directly to your savings account. After filing your taxes, the refund which is mostly in thousands can increase your emergency fund.
- Use credit card rewards. For every credit card user, there are cash rewards given by the credit company. If you can convert your cash rewards into savings, it will boost your emergency fund.
- Eliminate unnecessary costs. Look for the monthly spending that are unnecessary and trim them and in turn redirect that money into your saving account. It will ease up your savings for the emergency fund.
- Save more. To do this, you can get a second job or sell some items you don’t need in your home. Also, check your contributions after a few months to see whether you should save more to curb any situations that may arise such as moving to a new city, marriage, or childbirth.
- Keep up with inflation. Inflation can limit your savings. As the cost of living increases then you should also increase your savings for the emergency fund.
Did you find the article helpful? If you did, then you need to start saving for your emergency fund.