If there’s one thing that we’ve all learned from the pandemic, it is that uncertainty is an inevitable part of life, and we must all be prepared to tackle it in the best way we can. This is why having an emergency fund makes sense.
Not only will it help you meet unplanned, unexpected expenses, but it will also keep you in a secure financial state, even on a rainy day. And let’s face it. Who doesn’t like the idea of financial freedom?
If you don’t have an emergency fund yet and wish to create one, follow our 6-step guide below.
#1 Start Small
You may be tempted to set aside 3 to 6 months of your household expenses at one go to create an emergency fund. But that will only discourage you in the long run. Why? It’s simple. You’ll suddenly realize you don’t have enough to meet monthly expenses like utilities, and then you’ll dip into your emergency fund.
Take baby steps as you build your fund. In the first month, keep aside a small sum so that you have enough to get you through a month. This initial amount may seem small, but it will give you enough motivation to keep going and regularly contribute to your emergency fund. Remember, small, doable goals are better than none at all.
#2 Choose the Right Avenue
You may think that keeping cash at home equals an emergency fund. Nothing could be further from the truth. Storing your hard-earned savings as cash at home will give you no returns at all and prevent you from growing your fund faster. Not to mention that it will also tempt you to dip into your fund for the “occasional” splurge.
Choose a liquid savings option like a short-term fixed deposit account or a liquid mutual fund to stash your cash. This will help you grow your fund quicker and provide you with enough liquidity if you need to withdraw the fund for an emergency.
#3 Automate Your Savings
Isn’t it surprising how, no matter how honest our intention, there is never any cash left in our checking accounts for savings at the end of every month? An easy way to start saving for your emergency fund and continue doing it is to create a separate account and automate your monthly contributions. When you do this, ensure the transfer happens with a day or two of your paycheck credit. That way, you’ll always have the money for savings, and soon, you’ll learn to adjust your monthly expenses to accommodate the reduction. This is a more disciplined approach to savings as, on a psychological level, the automation registers as a commitment we cannot break.
#4 Deposit Additional Income
Additional income in the form of bonuses, promotions, etc., is wonderful, yes? It means we can finally have that gorgeous pair of shoes, or that new cycle, enroll for art classes, or afford a fresh coat of paint on the fence or our home’s interiors. And while we do “want” these, we also know that we can do without them. So when you get any extra income, don’t splurge. Instead, put that money into your emergency fund so that you can reach your financial goals faster.
#5 Monitor Your Progress
Automating your savings may make you forget about your emergency fund. But set some time aside to check your emergency fund. Watching the money add up will continue to motivate you. Not only will you bask in the sense of security that comes with a growing savings account, but you can also review and make necessary tweaks to your financial goals, depending on your progress.
#6 Don’t Put All Your Eggs in A Single Basket
If you’ve already started an emergency fund and are happy to stash all your savings into it, consider diversifying. Why? It’s simple. Other financial tools can help grow your emergency fund quicker—money market accounts (high-yield savings account) or money market funds (low-risk investments), for instance. You can also explore other aspects of wealth creation, such as paying off debts, creating an investment account and retirement account, buying a house, life insurance, general insurance, health insurance, and so on.
Building an emergency fund is a lot like working out. With regular practice and dedication, you can meet your goals and enjoy the finer things in life. It also helps you battle the unexpected challenges life throws at you and keeps you financially fit and sound.
We hope we have helped you in your journey to achieving financial freedom.