Being unprepared for any unexpected financial situation is the most dreadful situation to be in. Everything seems to be going perfect one moment and in the next, your car engine breaks down asking for a major repair. Or your water heater stops working right at the time when the winter is at its peak and you have no savings to afford the repairs. This is exactly the time when an emergency fund can be your savior.
Emergency fund acts as a cover for such situations which arrive without a warning and are beyond your control. It’s your cushion for the emergencies that are needed to be addressed right now. It’s your last resort for all the medical emergencies, a sudden car breakdown, a sudden home repair or an unexpected job layoff. Of course, it’s good to hold an optimistic mindset towards life, but you must never go unarmed to the war. To have an emergency fund is a necessity today as it means you are financially prepared for every storm that life might throw your way.
What is an emergency fund?
As simple as it gets. A fund that you create to meet any unexpected or sudden expenses is an emergency fund. You don’t want to fall into a debt-trap because of some sudden medical emergency or a personal vehicle breakdown or a job layoff and want to be as much prepared for the situation as possible. Emergency Fund provides you the much needed cover for any unexpected situation in life. Therefore, you must have an emergency fund.
Emergency fund is simply your umbrella for that rainy day which arrived without a warning. Even if the chances of these events happening are rare, it’s always good to be safe than to be sorry. The purpose of creating the emergency fund can be anything provided it is not used for partying or to buy a designer piece you just spotted on your way to office. Your emergency fund, as the term suggests, is meant for just the circumstances that are beyond your control and are extremely necessary to address.
Below are a few questions you need to have an answer for before you start building your emergency fund:
1. What’s your goal?: How much money do you want to have in your emergency fund. There is no standard answer for this question and the onus lies on you to determine your goals for the savings. This will also depend upon your financial needs and lifestyle. Make sure that your goal is realistic and doesn’t ask for a whole lot of financial sacrifices to be made on your end.
The most important part here is to start with something in the first place. Ideally, you would want to start with $1,000 and then increase the amount gradually. The goal here is to make sure that your emergency fund provides a cushion for all your monthly expenses for the next six months at least.
2. Do you have a workable family budget? Having a budget is a must to be able to save up for your emergency fund. Budget keeps a check on your monthly expenses and works as a guide on your way to financial success.
3. Do you have a savings account: This is the place where the entire amount of your emergency fund will sit. You would want your savings account to be untouched and used only for the purpose you created it for. Also, make it a point to open your savings account with a bank that pays interest on the amount saved.
Building an emergency fund
Having your first $1,000 in the emergency fund might sound like a huge task in the beginning. But if done with intent, it won’t be that difficult to build one. Here are a few ways that can help you build an emergency fund quite fast:
1. Cut back on unnecessary expenses: There are a lot of things you might be using that are not worth the amount of money you spend on them. Imagine how much money you can save simply by cutting back on those unnecessary expenses. Brew coffee at home rather than buying it outside. Carry water from home every time you go outside to avoid buying bottled water which costs way more than the former. Here’s a list of some wasteful expenses you can cut back on to save up for your emergency fund.
2. Sell the stuff you don’t need: If there are any items that have been lying unused at your home, you can sell them for money. Old clothes, books, shoes, cooking utensils and toys are some of the items that you can sell for some extra money to put in your emergency fund.
3. Start a side hustle to make extra money: Internet has made it extremely easy for people to make money right from the comfort of their homes. Many people, besides working a full-time job, often go for a side hustle to earn some extra money. If you think that you have time and energy for a money making gig, you can have a look at this post about some home business ideas that you can start today.
4. Try for a salary hike: If your salary doesn’t leave you with any money to be saved up for an emergency fund, you need a salary hike. Besides asking for a pay hike at your current workplace, you can try switching to a better paying job.
5. Don’t leave the change: Don’t leave the change on the table when paying your bills while dining outside or shopping at the grocery store. When you come home, make it a point to put the change in your emergency fund. Even if it’s a few dollars saved, remember that little drops of water make the mighty ocean.
6. Adopt a frugal lifestyle: You don’t have to live poor in order to live a frugal life. You only have to learn to be smart with your money. Here are a few posts that can help you save money while living a frugal lifestyle:
- How to cut your grocery bill in half
- Save money on your electricity bill
- How to stop impulse buying and save money
- Other amazing tips to save money
7. Take a Savings Challenge: If your finances are going out of hand and you are too broke to save up for your emergency fund, take a savings challenge for a month. Try saving every penny that you can during this period even if you have to make some temporary adjustments. Go for a home cooked meal rather than eating out, use public transport to commute to your workplace and cancel the subscription for that entertainment app. This small challenge can definitely save you at least a few hundred dollars that can be put in your emergency fund.
8. Make adjustments to your budget: Take a good look at your budget to know if you can cut back on some expenses. Is there a scope for saving on your heating bill? Can you save some extra dollars by buying your groceries during the store sales? Small adjustments in your monthly budget can make a huge difference to your savings that can help you build your emergency fund fast.
The existence of an emergency fund, even if it goes unused, will give you mental peace and the satisfaction of being prepared for whatever life throws at you. Not having an emergency fund is a dangerous situation to be in and can leave you in debt if you are unprepared for the financial emergencies. Start building your emergency fund today if you don’t have one. It will be a big step ahead towards your financial goals even if you begin with a small amount.