5 Facts To Consider When Creating An Emergency Fund
When you first think about it, putting together an emergency fund seems simple. It is a rainy-day fund that is simply money laid aside for unforeseen circumstances. The goal of such funds is to be there for you if all else fails and you can not meet an unexpected expenditure with your regular monthly cash flow. However, as economic instability and inflation rise, it is important to consider how you may be as smart as possible with the cash you have waiting on the sidelines expressly for "just-in-case" eventualities. A financial advisor can let you know that having an emergency fund is important as it protects you from having to take on high-interest debt in the event you do face a financial emergency
Start small and grow your fund
Buying a less costly automobile the next time you go car shopping and reducing your cell phone service are two simple methods to support your savings strategy. Skipping that two-week vacation, reducing your eating out spending, and saving your next raise or bonus are all feasible ways to increase your emergency fund. The strategy is to make consistent contributions to the fund. Ideally, you should approach it like any other monthly recurring expenditure. Set away the right amount of money from your paycheck.
When creating your emergency fund you do not have to go full force and save large lump sums at a time. If you can then that is great but you can start small when you start building your emergency fund. Any change from the day or week can be put aside into a physical jar. You could also reward yourself by contributing a few dollars to your emergency fund instead of eating out. Put money into your fund if you earn cash back on your credit cards or just paid off a large obligation, such as a personal loan or a vehicle. If you receive a tax refund, deposit it into your fund. By starting small you can develop a habit of saving and before you know it your emergency fund is ready to tackle any kind of issues that may come up.
The size of the fund is ideally three to six month’s worth of expenses
When making an emergency fund the common goal to reach would be to save the equivalent of three to six months of expenses and turn it into savings. The two elements that are generally recommended when creating an emergency fund are to define your individual emergency case. In other terms, what will the emergency fund be used for? It can be used for urgent repairs to the home or vehicle, unexpected medical expenses, or lack of income due to job loss. By having a clear definition as to what the emergency fund will be used for you can ensure proper use of that account. Another consideration is that depending on your earnings and how you define emergencies, the three to six months of expenses saved could turn into eight to twelve.
Each person's financial situation is different as some individuals can live with three to six months worth of costs such as rent, mortgage, vehicle payments, and bills in savings. However, someone that may be the sole provider for their family, self-employed, or indisposed from working may benefit from a larger emergency fund. Ultimately, the goal is to have enough to support yourself in the case of unplanned expenditure. The amount saved can be larger or smaller for everyone but having some savings is preferable to none. If you can not save three months’ worth of expenses, having one month’s worth towards your emergency fund is still ideal. In contrast, if you already have a well-funded emergency fund, consider adding to it to protect yourself from any unexpected bills.
The emergency fund should be, for the most part, liquid
There are a number of things you can do with the money that you earn. Some may invest their money into stocks or promising ventures while others may choose to stow them away in either a bank account or their mattress. However, when creating an emergency fund it is best to keep the money liquid. When an emergency does occur you want to be able to access that money quickly and without incurring penalties. You may have saved the recommended six months’ worth of expenses but diversified the fund and have three of the six months invested. In this case, it is completely okay to do since you still have access to a large portion of money when you need it. However, if you would like faster access to your fund but still have it growing you can place it in a high-interest savings account.
Do not let the fund sit idle
It is best that your emergency fund is mostly liquid, but it also should not just sit idle. When creating an emergency fund another important consideration is where you should place it. Having your savings sit in a regular account may diminish due to inflation and balance that concern the need to keep your money accessible. The best way to battle inflation and the loss of value of your emergency fund is to place it into a high-yield savings account. This account can allow you to very quickly take out the cash if needed but also earn as much interest on the lump sum of cash while not taking any risk or locking it up in a way that would be difficult to withdraw or where there would be penalties in doing so.
Put it into practice, only use it for emergencies
Even if you've successfully developed an emergency fund, forgetting why it exists could jeopardize your hard-earned financial savings. The main purpose of these savings is to serve a purpose of helping achieve a goal. When creating an emergency fund it is vital to keep that purpose in mind so that you can stay on track. The issues arise when you may begin to lose sight of the reason why you are saving money in the first place. The goal of emergency money is to keep you financially afloat during difficult times. Putting that money toward anything else, such as a trip or a wedding, might put you in financial jeopardy if an accident or emergency strikes.
Staying on track entails identifying and adhering to the criteria of an emergency. This goes back to clearly defining what counts as an emergency in your personal situation. An emergency for one person may not be an issue for another. It can be viewed that a transaction is not considered an emergency. A short weekend getaway would typically not fall into that criteria. Setting money away for such goals is a good idea, but using your emergency fund to cover them is not. If you are honest about what constitutes an emergency for you, you will be able to rely on your emergency fund for years to come.
Emergencies are disruptive, but they should not interrupt your life. However, to do so, you need to be prepared. You will be able to make progress toward what is most important to you while handling the financial curveballs that life inevitably throws if you have an emergency fund as well as separate funds for short- and long-term objectives.
