The pandemic year 2020 has made me feel how important it is to have an emergency fund. No matter how much you earn, how much you save, you must have an ‘emergency fund’ which will be your solid financial shelter during an unexpected crisis.
Young people usually don’t give much importance to ‘emergency fund’ while they continue to emphasize on spending and living life.
Eventually, during an unanticipated turn of events, they face financial crunch. Hence, crumble their life in despair.
If you do not want to face such a situation, here are some practical tips on how to save money for an emergency fund.
Why do you need an emergency fund?
Let’s first understand why do you need an emergency fund. What is the need for an emergency fund? How an emergency fund helps you in hard times.
Unexpected things happen in life without knocking on your door. They can come in the form of a medical emergency, car trouble, loss of job, or any other unplanned expenses.
We are not always prepared for the unforeseen turn of events. It’s difficult to have the financial resources available to cover your life’s requirement without giving you a hard time. Unless you are rich.
An emergency fund saves you from this situation by providing the aid which is required at that point in time.
Whatever the emergency, having money back up is a peace of mind. It provides you a cushion to help you cover all the expenses.
How much should you save for your emergency fund?
How much money should you keep in your emergency fund can be a tricky question. It varies. Based on what kind of lifestyle you have, income you have, and so on.
But the consensus says you should aim to have at least six months – a year of savings that could cover your living expenses. Again, it may vary depending on your circumstances.
If you have a higher income, certainly with a little discipline and saving goals, you can save more for your emergency fund. For me, one year of emergency fund should work fine.
If you have a small family, your requirements will be less and so does the expenses. While having a bigger family can trouble you if you have lesser savings in your emergency fund.
Thus, effective planning is crucial.
A person can figure out things within a year when something worst hits. But if not a year, at least save for six months.
Where to park your emergency fund?
Everyone should have an emergency fund which is secure and safe. You should always prioritize the safety of your fund. Look for safe places where you can keep your money.
In my opinion, a savings account is one of the safest place where you can park your emergency fund. Build a habit of saving small and each month, eventually the money will grow with interest and add up to your emergency fund.
Fixed Deposit is one account where you can keep a certain wholesome amount and let it grow with the interest rate that the specific bank is giving. When you need the money, you can easily break the account and withdraw.
If you want, you can also keep a stash of money hidden somewhere safe in your home. This could be risky but in need of dire circumstances, you wouldn’t have to waste your time waiting in the bank for withdrawing your money.
How to save money for an emergency fund?
Finally, let’s discuss
how to save money for emergency fund.
Maintain a monthly budget
When you want financial stability, budgeting is the most important thing to consider. You want to save money for an emergency fund, with budgeting it will help you increasing your money and save a chunk for the emergency fund.
Create and follow a monthly budget. Know where your money is going, where you are overspending, where you can save more.
There are so many monthly expenses you need to cover first. If not plan properly, you could end up spending all your money and leaving behind nothing to save.
Thus, plan, target and set a budget to save for any fund.
Limit your expenses
There are many things in life that are unpredictable. We can not plan the unexpected but we can be prepared.
Often people think they don’t need an emergency fund because they have a good income and they have nothing to fear.
But what’s the harm in building a fund which can be your cushion during a crisis? With a positive attitude towards financial stability, you must identify your regular monthly expenses.
Get an overview of your monthly expenses with the help of a budget plan.
To save a sufficient amount, you would need to reduce your monthly expenses without negatively impacting your quality of life.
Look for the gaps where you can cut your living expenses. For example, you can save money on fuel if you walk more and commute by public transport.
You can lower your grocery bills if you buy things on sale and discounts. Every little of savings helps and pushes you reach a step closer in achieving your financial goal.
To build your emergency fund you have to look for opportunities that will help you grow your money. No one will ever tell you how to do that you have to pave your own path to grow your money.
There are a few ways that can help you do that – whatever you are earning invest at least 10% of your money in a high yield savings account.
Save small but for a longer term.
Start side hustles to earn extra cash.
Once you have a surplus cash flow, it will be easier for you to set up a separate emergency fund without hampering your other savings account.
Enhance saving habit
Most people find it difficult to build a habit of saving money. The habit which benefits you for maintaining a secure future.
When you have money saved up, you have a cushion to fall back in your worst time. You can revive your life back without thinking about the expenses.
There can be any emergency situation, and money is the first thing we always need.
Thus, developing a habit of saving makes it a lot easier.
You can automate your savings, start saving at an early age. Learn about finances and money more that will incur in you the habit of savings.
Set a target for your fund
Setting a target for your emergency fund is important and a necessary step to look forward.
Think about your needs for which you want to build the fund. For example, you want an emergency fund for medical, your child’s education and household expenses to cover.
Analyse and evaluate how much you need to cover your requirements. Figure out an approximate amount and once you have a fair idea of how much money you will going to need, start working on your saving goals.
Save the lumpsum
Saving the lumpsum amount is a good way to save for an emergency fund. For example, save your bonus from the salary for your emergency fund. Or, the amount you get from the side hustle, save that for your emergency fund.
Set several small savings goals
If you are a beginner and you are not very good at savings. But as creating an emergency fund is important, you can start with some small savings goals. This will motivate you enough to stick to the budget and save.
You can open several savings account each to fulfil purpose. Dedicate one account only for an emergency fund. Allocate some amount every month to this fund, eventually as the years go by the money will increase to your saving.
Sell unused items
When you are saving up for an emergency fund, you could use the money by selling unused items. Declutter your home and sell all the unused items that you no longer needed.
You can sell them online and offline, get some extra cash and save them up for your emergency fund.
Websites like Craigslist, eBay, Facebook selling community and etc are the places from where you can earn money by selling things.
Double your income
For a surplus amount in an emergency fund, you have to double your income. You have to look for ways to increase your monthly income.
For example, if you are married, consider both are doing job. Or, start side hustles along with your primary job. Plan and invest your money in secure places where your money will be safe, but increase with higher interest.
Some prefer to invest in profitable business, and once they earn the reputation of doing good work, it gives them double the income.
Likewise, if you are not pleased with your current job, consider switching to something that interest you and let you grow. When you enjoy your work, you do better and it motivates you to excel in your profession.
When you are professionally doing well, eventually you will earn more and can plan systematically about your savings, investment and creating emergency fund.
Final words –
I am not any financial expert. I am a someone with the middle-class background and have been managing money for years. Growing up I saw how my mother saved money when we had a low income. I have been living a frugal life and I feel my financial tips will help you getting a control over yours.