Unexpected financial emergencies can hit us hard and give us a tough time to proceed ahead. But with a go-getter attitude and building an emergency fund, you can save yourself from torments. The post elucidates why is an emergency fund important and how to create an emergency fund for your financial well-being.
But before walking through its creation, let’s delve into its importance.
Why is an Emergency Fund Important?
An emergency fund is a cash reserve that serves you well for unplanned expenses or financial exigencies like medical, home repairs, loss of loved ones, loss of income, etc. You can create an emergency savings account to monitor your monthly expenses and spending.
The other reasons for rainy day savings funds could be
It covers financial surprises
- It pays you when you are suddenly laid off from your organization
- Covers unexpected events
- For Dental Emergency
- Sudden Car Troubles
- Attorney Fees
Benefits of Rainy Day Savings Fund
Investing in an emergency fund solidifies your backing and reduces stress when something unfortunate happens.
- It gives you the confidence to deduct worries before making financial decisions.
- It keeps your expenses in check because no matter how much you earn, it translates into money savings.
How to Build an Emergency Fund?
Wrestling with your financial goals is a nightmare. There are multiple factors that elbow for attention. So, let’s not succumb to the economic madness and find a solution.
1. Start Slow
Putting huge money chunks suddenly in an emergency savings account seems far from reality. The doable goal could be to shoot money in installments.
After reaching the goal, elevate your second goal and third go even higher. By then, financial discipline might have touched your nerves.
2. Keep Aside the Funds
Whether you are creating an emergency fund for business or personal purposes, cover the essentials that repeat each month, like groceries, utilities, rent, and minimum debt repayments.
Once covered, move on to other necessary expenses that could become a massive blow if not paid on time, like auto maintenance, trash, car insurance, health insurance, etc.
Though they are one-off expenses, paying them prevents future debt piling.
3. Create an Emergency Savings Account or Start Automating the Payments
Money is a rare commodity, and lack of it might bite you hard.
So, to cushion yourself from emergencies, start automating your savings by creating a direct deposit account where the payment will be automated monthly or regularly.
4. Don’t open multiple credit cards.
Once the savings are automated, don’t be lulled to have more credit cards or let spending creep in.
For example, if you bought a new pair of shoes last month and are tempted to buy them again this month, remember your savings might get depleted.
5. Be Realistic
Having an emergency savings vanishes your financial anxieties but be realistic; don’t try to reach your goal in a few days or as fast as you can.
It will make the process a dull roar.
6. Don’t be Over-frugal.
Building an emergency fund could be pragmatic and enjoyable by not being over-frugal.
You can stash off the cash and create money for leisure and enjoyment. Otherwise, you might feel anxious and might spend more.
Conclusion
At times you might feel out of control for the loss of money. But certain things are not in our hands, whether it is a job loss, pay cut, retrenchment, or being furloughed, but having a stack of cash helps you regain control of your life.
It is a powerful and emotional way to maintain your market rapport. Building an emergency fund gives you concrete reality, and it can be comforting when you can’t stretch the cash.
Even when you have a healthy cash balance ratio and a steady income, there is nothing wrong with maintaining the fund. Just cut back a few expenses, increase your cushion, and amplify your savings for a better future.
FAQ
- How should you calculate an emergency fund?
Thriving well during financial setbacks signals that you have had to build an emergency fund. But for all those who are in the midst of a crisis and want to know how to find out the fund that contributes use:
- Emergency Fund Calculator
- Create an emergency savings account
A rule of thumb is to create a 3 to 6-month emergency fund. For example, if your salary is $30,000, create a fund of $1,80,000.
- What to pay first, emergency or debt?
It’s a long debate with different opinions surrounding it, but crushing the debt to smithereens should be the first goal.
- Is it okay to use an emergency fund?
Many people are of the opinion that these funds are equivalent to your savings and should not be touched. While it could be a good goal at the onset, it’s okay to tap and replenish these funds. After completing the goal, you can set other unexpected expenses.
- How to proceed in times of uncertainty?
If uncertainty unfurls around your income, it’s worth hanging to cash by pursuing an emergency fund even if you have a big debt paydown. It seems like a financial crash at that time, but reducing your expenses and putting in funds can give you time to think calmly when you have been laid off, or your salary has been reduced.
- What is the best account for emergency savings?
Deposit your money in a high-yield savings account to benefit from it. You can either go to brick-and-mortar banks or online banks to transfer the amount. High-yield savings accounts provide you with better interest rates than conventional savings accounts. You can research online and find banks offering it and its associated perks. Do consider rules related to withdrawals and extra fees they might deduct for sudden withdrawals.
