Saving up can feel overwhelming, especially when you have to do it from scratch. However, coming up with enough funds to cover unexpected expenses is even more challenging.
All of us have experienced tough moments, be it job loss, broken appliances, or medical bills that often hit at the worst time. Mostly, people raise this kind of funds by selling assets or taking high-interest loans.
If you are in such a situation, you may need to consider creating an emergency fund. It merely means setting aside ready-to-use cash to help you out during financial emergencies. Therefore, the money enables you to maintain your normal lifestyle even during hard times.
With this kind of preparedness, you can recover quickly and get back on track even after a hard blow. Let us show you how.
How To Save Emergency Funds
To gather a considerable amount of savings for emergency purposes, you need to stack it in a different account. As long as you have enough reasons to save, and the right motivation, you can do it. However, it requires great diligence and consistency. Here are several steps to guide you through.
Decide How Much You Are Willing To Save
Look over your finances and determine how much you can afford to save. Please set your initial target low to avoid disappointments. Additionally, set an exact weekly or monthly goal. It will get you into a regular saving habit making the task less challenging.
The best way to achieve this is by making saving a key priority. Most people prefer to reserve the leftovers after spending an entire monthly salary. However, it would be best to pay yourself first by depositing the emergency funds as soon as you get paid.
Automate Your Savings
You also need to shift to a system that allows consistent contributions. Having to withdraw money from one account to deposit it in your emergency account can be tedious. Often, you may feel lazy to do the transaction or even forget.
You may also end up spending the money on other unplanned purposes. To avoid this, please set up an automatic transfer to take care of your savings account.
Assess and Adjust the Contributions
Regularly check your savings to monitor progress. The good thing about automating your deposit method is that you will get your account balance notifications. Besides, you can manually run a total of your contributions, and a positive trajectory will encourage you to keep going.
Please adjust your savings, especially when you get a major expansive event like marriage or a child. Additionally, if you get a promotion or more cash inflow, you can always save more.
How Much You Should Save For Emergencies
Various factors will affect the amount of money you need to deposit in your emergency funds account. Your contributions will vary based on your lifestyle, dependents, income level, and expenses. Experts recommend that you set aside three to six months of your essential living expenses. It may sound like a tremendous amount, but if you can try saving up something little weekly, it will add up.
Compute Your Monthly Expenses
Sum up your rent, mortgage, loans, school fees, insurance premiums, bills, and other monthly expenses. Multiply the total by the number of months you wish to cover to get your emergency fund size. Additionally, think about some unexpected situations that you have experienced in the past and how much they cost. It will help you have a precise goal of how much you need to set aside.
Besides, you can choose to treat these funds like insurance. Meaning that you should deposit enough to meet your needs during emergencies fully, but you don’t want to put too much money sitting around. To determine the right amount, you also need to consider whether you are in a single income household. For this, you may need to aim higher.
Diversify Your Investment
Also, consider whether you have diversified investments; if one dries up, the others can keep you afloat. At a minimum, it would be best if you have a three-month expense as your emergency fund. However, if you have dependents, it would be wise to consider the six months’ salary. It also applies if you work in high-risk areas or a high turnover career.
As you get better, aim at depositing more funds into your account. Most high wage earners prefer to reinvest their money, but please leave a considerable amount in your emergency saving account.
Where To Keep The Emergency Funds
Place your emergency money in a safe and accessible account where you can withdraw on urgency. However, ensure that it isn’t too convenient to avoid unnecessary use. Besides, it would be wise to deposit the money in a different bank account. Some of the best places to keep the money include;
High-Yields Saving Accounts
The best place to conveniently save your emergency funds is in a high-yield savings account. It’s a safe option where you can access your money when needed. Additionally, you will earn some significant interest in your deposits.
Please compare the interest rates in various online banks offering high–yields accounts and pick the one with a competitive offer. Further, choose one with no monthly fee, balance requirements, or strict withdrawal concerns.
Money Market Account
Still, you can consider the money markets where you will also enjoy substantial interests. You simply open an account at a local bank that you can access through an ATM or web-based account management system.
Money markets are convenient options with credit card features and cheque writing privileges. It pays to shop around before selecting the right option. However, you need to make higher initial deposits, and the account has a six-month withdrawal limitation.
Certificates Of Deposits (COD)
The COD accounts require you to save your money for a specified time from a month to five years. After the period elapses, you will then withdraw your money and the earned interest. You can still withdrawal your money before the preset period, but you will have to pay a fee. It has higher interest rates than the rest.
Tips To Help Build On Your Emergency Fund
Saving up several months of your living expenses may seem like a huge goal that may take years to achieve. However, there are several ways in which you can make some extra money throughout the month. If you have a limited ability to save, check out the following tips to get you started.
Slash Your Budget
You can free up extra money by trimming your expenses. Prioritize your needs and do away with non-essential spending to help achieve your saving goals faster. Please use a shopping list to help you focus on what you need. Also, do away with unnecessary bills, such as premium cable channels that you never watch.
Relocate Lump Sum Receivables
When you receive an unexpected income, use a small amount, and relocate the rest to your emergency funds account. To avoid temptations, you can have the refund deposited directly to the account.
Also, keep change and drop the coins in a money bank at home. When the jar fills up, you can transfer the funds to your savings account. By using your credit cards wisely, you also get some cash-back rewards. Reallocate the funds to build on your emergency saving account.
Survive On The Previous Month Paycheck
Cut on your spending and try to live within your means. Please spend the money available in your account of the prior payment instead then planning for the expected cash.
Avoid squandering your money; instead of regularly going out for dinner, enjoy some home-made meals. Even better, you can choose to use public means at times.
Use Saving Accounts Opening Bonus
Some financial institutions offer a welcome bonus to new clients. When you open an account with such a bank, direct the bonus rewards to your emergency saving account. Though it might not sound like a quick way to build on your funds, you will still make a difference.
Get Your Partner On Board
If you have a spouse, encourage them to contribute towards the emergency funds. You don’t necessarily have to create a joint account, but it would be wise to share similar financial goals. It will help you make better decisions for your family, equipping you adequately to handle any emerging financial problem.
Reasons You Need Emergency Funds
The emergency funds act as your security against the loss of income or other unexpected scenarios. The following are reasons why you should build on the account.
To Avoid Costly Debts
When faced by emergencies, you may drown in debts if you don’t have a backup plan. The funds will help you cover expenses you didn’t anticipate. Please save up enough money to run you through in case you stop receiving a regular paycheck.
Additionally, a significant health expense may lead to financial strains. With a few months’ worth of emergency funds, you can avoid the hassle of rushing for some high-interest debts.
To Secure Your Future
As a primary breadwinner in your family, saving up emergency funds will help you get through tough times. You will afford your family’s basics during low business periods or after a contract. When working toward high financial investments, like buying a home or starting a business, some urgent situations can halt your projects.
The savings account prevents you from moving backward on your goals. Although your project may slow down a bit, you will quickly recover and move forward. Additionally, it will help protect your retirement savings in the long run.
To Enjoy Peace Of Mind
Financial constraints can threaten your well-being resulting in stress. On the other hand, having enough emergency funds gives you the assurance that you can handle any unforeseen situations. It helps you focus on your primary goals, with no money worries. Further, it significantly contributes to your career success and productivity, so you concentrate on making more money.
To Earn Interest
Another main benefit of emergency funds is that you can make extra money by just depositing. For this, please consider a great interest-paying banking organization. The more funds you accumulate, the higher interest you earn.
To Keep You From Bad Spending Habits
Building on your emergency funds ensures that you don’t misuse your money. It keeps it out of reach so you won’t feel tempted to impulse buy. Further, it allows you to track your savings to know how much you have at hand and how much you should add.
When To Use Up The Emergency Funds
After saving up the money, you need to develop strategies to manage the account. Please note that not every situation is an emergency, and you need stay remain focused. It would be wise to weigh in situations to justify the use of the money.
You can use your emergency funds to cover the following:
- Car repair
- Medical expenses
- Job loss
- Home repairs
- Family emergency
- Natural disasters
- Unanticipated travel
- Funeral costs
While the emergency funds are here to help you out during unpredictable situations, some people tend to stretch the idea to cover some non-essential wants. Keep in mind that the money acts as financial security to meet essential needs.
Before making any withdrawal, ask yourself whether it’s necessary, urgent, or unexpected. While you may still have valid reasons, to use up the money, it would be wise to hold off some needs until you get extra cash.
Here are examples of ideas that don’t justify withdrawing from your emergency funds account.
- Miscellaneous expenses
- Replacing worn-out items in the house
- Buying a new TV
Having a reserve fund for unexpected situations can help you avoid overreliance on loans and other credit forms. Begin with small goals, then gradually upgrade to meet your long term objectives.
After some time, your account will accumulate substantial amounts and even earn some interest. Every extra dollar counts, and before you know it, you will save enough money, which gives you better control over financial situations.