Life is full of unexpected turns and twists and this brings us to emergency fund benefits and how to build an emergency fund for oneself. When setting aside emergency funds, you will also need to calculate how much to have in savings.
Why start an emergency fund?
Well, there are plenty of reasons. There are many events that could destabilize your financial position. If you don’t have funds to fall back on in an emergency, it could unnecessarily stress you out.
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You could save yourself this kind of stress by having an emergency fund and putting some money into it on a regular basis. Just tap into the emergency fund in case of an emergency and you’re up on your feet again.
- Why You Should Start an Emergency Fund
- Steps for Starting an Emergency Fund
Why You Should Start an Emergency Fund
- A Layoff
It is said that you should save at least 6 months of living expenses in case of a layoff. You should probably be able to find a new job within this time. If you have an emergency fund, you can get through a layoff without panicking. You don’t want to withdraw money that you put into 401k or any other retirement funds.
Tip: Check out the weekly benefits you could be getting from the state unemployment insurance agents, so that you can figure out how much you need to stash away for your emergency fund.
- Medical Emergency / Accidents
You may have to pay a huge amount towards a sudden medical emergency or an accident. This is one of the most important reasons for having an emergency fund.
- Creating an Emergency Fund for Unexpected Travel Expenses
There might be a sudden death in the family that involves travelling and funeral expenses. Such events are unpredictable.
- Unexpected House Repairs
Sudden home repairs in the form of a new roof, some electrical or plumbing problems or repairs related to the foundation, renovation work etc. could destroy your monthly budget. Instead of opting for emergency loans that just increase stress, your emergency fund could save you.
- Unexpected Pregnancy
You need an emergency fund to cope up with such a contingency. Sure, pregnancies are a moment of joy, but it could be jarring news if you’re not financially prepared for bringing in a baby into this world. Parenting does not come cheap.
- Sudden Car Problems
Put aside at least $50 a month for sudden car repairs and emergencies, instead of going in for emergency cash loans.
It happens to all of us. You’re going about smoothly with your daily drive and suddenly there’s this dead battery or a blown tire staring you in the face.
- Relocating / Moving Out
According to Jessica Moorhouse, it would have been impossible for her to move out from Vancouver, where there were not sufficient job opportunities, to Toronto, if it hadn’t been for her emergency fund.
- Avoid Frivolous Spending
Saving for an emergency fund makes you more disciplined with your money and helps you when you need emergency money. When you have more of money, you tend to be more frivolous with it, rather like a dog with no leash.
Steps for Starting an Emergency Fund
Now that you’re convinced about starting an emergency fund, let’s get on to how to do this.
#1. Determine the Time for Emergency Cover
- Consider the amount of time you might need the emergency funds. For instance, anywhere between 6 to 9 months should suffice.
#2. Determining Baseline Budget – How much should my Emergency Fund be?
- Calculate all your bills and expenditure for a month and then multiply it by 6 or 9, as the case may be. You will also have to include mortgages, payments for car insurance, credit card payments along with groceries.
- How big should my emergency fund be? Make the estimate on the higher side, as you don’t want to fall short in case of an emergency. 10% of your paycheck is considered a good amount to begin with.
Tip: The amount you need to put aside will also depend on the number of earning members in the family.
#3. Select and Open an Accessible Account
Once you have decided on the amount, you have to select the right investment option. Don’t pay too much attention to the returns in this case. The important thing here is that the funds should be easily and immediately available at a short notice.
- The best place for emergency savings is to put your rainy day fund in a separate account or even a separate bank. This way, you are less likely to dip into it in the normal run.
- Park at least 25% of the amount in a savings bank account, from which you can withdraw money 24/7. Consider other more tax efficient options, such as mutual funds investments, with better returns and less volatility as well.
- Have a debit card and ensure that you have enough limit for cash withdrawal.
- Open a joint account with your partner.
#4. Automating Deposits
Take the time to automate your deposits as employer direct deposit. In this way, you are ensuring that the money goes into the emergency kitty directly and you don’t spend it for non-emergency expenditure. Then you can spend the rest of the money with a guilt free mind.
#5. Increase Savings – How to save for Emergency Fund
- Cut down on expenses.
- Try to increase earnings with supplemental or part time jobs.
- Begin small and then slowly increase the savings amount Write down your daily expenditure and try making cuts to the budget
- Cut out the coffee shop; bring lunch from home; give up on smoking; cut out the cable; reduce your mobile phone bill, you get the drift.
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An emergency fund is essentially a certain sum of money that you leave untouched, except when life suddenly throws an emergency at you. It could be a job loss, a crash in the stock market, unexpected medical bills, sudden travel plans among others.
Use budget apps to manage your money better. It is imperative that you take the initiative to secure your finances for such emergencies. Take the time to prepare for the pitfalls in life. It’s surely better to be safe than to be sorry, right?
It might be painful initially to put away an amount after paying all the bills, but the habit will soon start growing on you and saving will not seem so daunting after all! So, are you in?