Hey there, you need an emergency fund.
Everyone needs an emergency fund. As much as we like to go through life without thinking about emergencies, they come up now and then. Best stored inside your savings accounts, this fund is perfect for covering any unexpected expense that crops up when you are least prepared for the same.
So, if you suck at saving money (like most of us), this article is for you.
We have covered the crucial importance of emergency funds and most importantly how you can save money to build your contingency fund. Stay tuned.
What Is An Emergency Fund?
An emergency or contingency fund is a savings account where you can save money to pay for any unexpected expense like:
- Unemployment.
- Replacement or repair of home appliances.
- Major vehicle fixes.
- Unforeseen medical expenditure.
Why Do You Need An Emergency Fund?
Contingency funds are great financial buffers that will help you stay afloat without depending on high-interest loans or credit cards when you are hit by an unplanned, large expenditure. Moreover, if you are already in debt, it is best to rely on your emergency fund during matters of trouble, instead of borrowing more money.
So, here’s why you need an emergency fund – why is it so important to save money even when you are not expecting any random expenditure?
1. Life Happens: Anything Can Go Wrong At Any Time
If you need a reason why saving an emergency fund is important, the simple fact is that life happens. Unexpected situations come up—it’s a fact of life. You try to prepare for everything in advance, but illness, accidents, job loss, and even pandemics can change life as you know it.
An emergency fund can include reasons like needing extra money for an unexpected need in the future, auto repairs with collision estimating software, wanting to have enough money in case you need to quit your job and want some leeway before finding a new one, or simply because you don’t want to go without the basics should anything come up in your future.
2. It eliminates Stress:
If you live your life knowing that if you lose your job or your car breaks down and you don’t have money to cover your living expenses, let’s just say that that is a lot of stress to deal with.
Instead, you want to set aside money that helps to eliminate that stress because you know that no matter what, you’ll have money that will take care of you in the meantime.
3. Protects Long-Time Goals:
An emergency fund will offer you financial security and some peace of mind, helping you avoid debts in the process. But that’s not the only benefit of saving money. With the help of this fund, you can avoid borrowing money from your savings – money that you had saved for your long-term goals like buying a car, or for retirement.
Moreover, avoiding dipping into your savings for long-term goals will also help you ensure that you are on track with achieving those goals as well.
How To Build Your Emergency Fund?
So, if you’re looking for a way to get on top of your savings and be ready for anything, here are some tips to help you build your emergency fund!
Step 1: Figure Out Where To Keep Your Money
Where do you keep your money? If you keep your emergency fund in your checking account, that may be too tempting for you to dig into. It can be too easy to consider small hiccups to be emergencies when the reality is that you can get by without using that money.
You could go old school and keep it in envelopes under your bed, but if anyone knows about it or you get robbed, that could be asking for trouble.
The best thing to do is to open up a savings account, maybe in another bank, so that you can set aside that money for one use: your emergency fund. You could also consider putting it in a high-yield savings account so that it grows while you save.
Step 2: What Is The Amount You Are Planning To Save?
If you only have enough at this time to get started with a basic amount, make it $500 to $1000, however, you want to be sure that you’re actively striving to save more as you go.
As you learn how to budget well, make more money, or cut back on some other expenses, you could start putting in more so that you can actively save up to three to six months of life expenses, such as rent, insurance, food, etc.
The best goal to shoot would be for six months to a year of expenses so that you can feel confident that you’re ready for whatever may come your way. This is especially true for those who have work that isn’t always consistent. This way they can still be sure that they’ll have the money they need to take care of themselves should there be a couple of bad months.
Step 3: Make A Budget And Stick To It
It’s hard to save if you’ve never done it before. Instead of just waiting for yourself to figure it all out, sit down and make a budget. A budget will allow you to see where you need to cut back on expenses, how much you need to set aside bills, and what could be a substantial yet safe amount to put aside for your savings. With a budget, you can be confident that you’ll more expertly set aside for your emergency fund.
Build Your Financial Protection With Emergency Funds!
Do you want to make sure you’re financially protected? If so, then start working on that emergency fund today with the above tips!
When you are saving money, it is vital to draw a line between everything else and emergencies. In fact, if you can save a reasonable amount of money in your contingency fund, it is best to start another savings account for inevitable and irregular expenditures such as clothing and vehicle maintenance.
Moreover, if you think you need some help to stay organized with your savings, you can consider opening subaccounts or separate savings accounts for various financial goals.
After all, everyone saves for the unforeseen. When you have something as backup, it can help you weather a short-term storm financially instead of going into debt.
