Emergencies, by default, are unexpected and unpredictable. Emergencies such as sudden illness and accident can disrupt your day-to-day cash flow and take you out of budget. And when you don't have money to handle an emergency, you could be forced to go into debt.
One of the best ways to avoid financial crises in times of emergencies is having an emergency fund. An emergency fund helps you handle unforeseen expenses and stay out of debt in times of financial pressure.
To save effectively for your emergency fund, you need to understand what an emergency fund is, how much you need to save, and how to go about it. In this article, we’ve covered these details to help you make well-informed decisions towards your emergency savings.
What Is an Emergency Fund?
An emergency fund, also known as a contingency fund, is a separate savings or bank account set aside to cover unforeseen expenses in the case of an emergency. Since emergencies are an inevitable part of life, it is essential to plan for them to avoid throwing your finances off balance when they eventually happen.
Examples of needs you can settle with emergency funds include hospital bills, car repairs and upkeep in case of sudden loss of job or business.
How Much Should You Save?
There is no hard-and-fast rule as to how much you should save in your emergency fund. Most financial experts recommend keeping 3-6 months' worth of expenses. But ultimately, it depends on your lifestyle, saving habits, and level of income. For instance, you might need to allocate a bigger monthly percentage to your emergency funds if you have outstanding debts or if your car is faulty.
One of the easiest ways you can save for emergency fund is by putting away a small amount of money at regular intervals, say monthly. You can consider adjusting the amount to suit your financial status per time. Conventionally, the more stable your income is, the less you need in your emergency fund.
How To Build Your Emergency Fund
Building an emergency fund will help give you more peace of mind in times of financial crisis. However, it takes an effective plan and consistent efforts to set up and sustain an emergency fund savings. Here are three simple steps to guide you through the process of building an emergency fund.
1. Plan a Budget
A budget helps you plan your income and expenditure to achieve your financial goals. To begin, create a list of your expected monthly income and expenses. While making your budget, you will be able to see how much money you have available, how much you need to spend, and how much you can channel to your emergency funds.
2. Automate Your Savings For Emergency Funds
No matter how good your budget is, it will not make any difference if you do not adhere strictly to it. One of the best ways to build consistency in savings for emergency funds is to automate your savings.
First, map out a percentage you want to save and set aside an account for it. Then, automate the savings by authorizing your bank or financial institution to automatically deduct that percentage to your emergency fund account on a fixed day every month.
3. Adjust Your Savings Accordingly
The percentage of your emergency fund savings should reflect your current income status. So, if you get promoted or add an extra source of income, for instance, you should also increase your emergency savings.
Where To Keep Your Emergency Fund
Emergencies come unannounced, so you should keep your emergency funds where you can easily access them. You can decide to keep it in a simple savings account that is connected to your checking account. Another place you can keep your funds is in an online bank with a higher interest rate, and most importantly where you can transfer money quickly.
Conclusion
Planning for emergencies is a positive step towards better financial stability. The money you save for emergency saves you from running into debt and other financial crises in times of urgent needs. If you apply the information in this article, you can rest assured that you’re saving enough money in your emergency funds for the rainy days.
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