An emergency fund is an indispensable tool for anyone who wishes to live a financially secure life. Unplanned travel expenses, health expenses, automobile repair, and other unexpected events often demand money we regularly don’t have a budget for. This is why knowing just how to start and build an emergency fund is paramount.
What is an emergency fund?
An emergency fund is the total amount of money kept away as savings that we can fall back on when the unexpected happens.
This requires planning and discipline though. It is imperative for someone who wouldn’t want to go through the stress of sourcing for money when there is an emergency.
There are several emergencies that can come up and having funds that will support us in those moments is essential.
So what are the things we need to know to successfully set up emergency fund.
Steps to get your emergency fund started
The following are the step by step processes of starting up an emergency fund.
1. Plan your strategy
In setting up an emergency fund, one needs to first make plans. Remember, he who fails to plan has already planned to fail. Therefore, in planning for emergency funds, you are to know how much you earn monthly and also itemize your expenses. That will give you an idea of how your income flows both in and out. Sometimes, after doing this, we notice that we spend more than we earn, in that case, it is almost impossible for such a person to save.
And the knowledge of this can help such a person to reduce his/her expenses and key into the habit of saving especially for an emergency situation.
So, let us imagine a person who earns a low monthly income, such a person would not have a large percentage to start savings. So, we can rightly say, the more you earn, the more your savings and vice versa. To start an emergency fund, you need a stable income.
2. Save in scales
Do not burden yourself with the stress of saving high amounts for emergency funds. Remember, it’s easier to spend money than to save. Therefore, start with little, then as you keep saving and you will find yourself being consistent. Then, you can now scale higher.
The habit and practice of saving can be said to be paradoxical in nature, like saying it is simple and technical at the same time. It is technical because one needs to understand why and how to go about it, like the saving as you earn and scaling. It is easy because once you know the intricacies involved, you’re good to go.
3. Accessibility of funds
Do not save your emergency fund in a place where when it is needed, it gets difficult to access. Yes, it is not wise to save your emergency fund in your main account, but it should be in a place where it can be easily accessed.
When saving, some people might be of the opinion that it is better to save in a place where the money cannot be easily accessed. So you don’t get tempted to withdraw when there is no real emergency.
Well, it might seem true, but it would not be helpful if an emergency should come up as gaining access will become difficult. Savings for unexpected situations demand a proper mindset. You must be determined to save and save well.
It is advisable to use separate bank accounts. Savings account preferably for the emergency funds that will be separate from your salary account.
4. Be consistent
The consistency they say is the soul of business. Likewise in savings, it is of great importance to be consistent in saving your emergency fund. Do not start and stop. Set your mind to it and make sure to work towards it.
And sometimes, it might be that the estimated amount of money you were hoping to save has been realized. That should not stop you from saving more.
The thing is, in life as we grow and achieve things, be it occupational, marital, or any type of achievement, our needs arise and the type of emergency situation we find ourselves in changes. From being single to being married, our emergency situation will vary.
So the emergency fund should be increased too based on usual expenses. According to most Finance Experts, the emergency fund should be the living expenses for three to six months. However, it is still wise to increase the amount and keep saving. The higher your funds, the more secure you will feel in the face of emergencies.
Where to Keep Your Emergency Fund
Deciding to save up for your emergency fund is a great step and dedicating to the plan will do a lot of good. However, you still need to put all these funds in a safe place. You’re sacrificing for it so the money has to be kept in a place that is safe and accessible while generating interests.
There are a couple of places emergency funds can be kept, all with its unique benefits.
High yields savings account
Putting your money in a savings account is a good idea but it’s way better to save your money in an account that yields interest.
High yield savings account unlike the normal savings account generates a higher interest. Saving in a high yields account is obviously better than a normal savings account.
Asides the higher interest generated, the interest credited back to you is calculated at a compound rate. So, when the rates are added, you end up generating a whole lot.
Certificate of deposits
This is also a great way to save money. Here, you still will be generating higher interests compared with the regular savings account but it comes with a few strings.
The certificate of deposit method of savings requires you to deposit a certain amount of money then agree on the time the amount will be left there. The time frame could be six months, one year, five years, and so on. Just a time frame that will be stated in the agreement.
When the time frame elapses, you get to return your certificate of deposit and get your money back with all the interest it would have acquired for the given period of time.
However, you can not just go request for your money anytime. You will have to wait for the time that was agreed upon. In cases where you need your money back, you will have to face a penalty.
Asides that, certificates of deposits are a great way of saving.
Money market account
Money market accounts are not your regular savings accounts so the results you will be getting is way higher.
To create a money market account, you can reach out to your local bank or create an account online. The account created as well as the money kept in the account can be accessed via an ATM or the internet.
These types of accounts seem like the perfect option for saving emergency funds since the money kept here can be accessed and withdrawn easily at any time.
The only thing counteracting this feature is the money market fees. Sometimes, the fees end up eating into the returns on your deposit.
In this method of savings, you lend money to the government for a certain period of time. After the time lapses, you get your money back with the returns on them just like certificate of deposit.
So, it is giving a loan to the government and when it matures you get to access your money.
These are possible options to consider. Having an emergency fund sets you up for a life of financial stability. Select your most preferred option and start saving an emergency fund today!