Regardless of how much you earn monthly, having something saved up for bad weather is essential. Several circumstances can come up suddenly, under which you can put your life savings under a significant amount of stress.
Why Do You Need An Emergency Fund?
If your car breaks down, you do not want to opt for an emergency car repair loan but rather have money saved to get your vehicle repaired immediately. The same is true even when you are sick. This is the reason that it is essential to save up for an emergency.
Bad times come unpredictably and for this, you have no one to depend on but yourself. If you have a vision of smooth sailing life with minimal inconvenience, an emergency fund is a must.
Steps To Build An Emergency Fund
There are several different ways that you can save for unpredictability. There are options under which you can ensure that your emergency fund keeps on growing passively, even as you add a periodic amount to it. Let us look at the numerous steps involved in creating an emergency fund.
List Your Monthly Expenses
If you are looking to create an emergency fund to add money periodically, it is essential first to decide where this money will come from.
The money to be allocated to your emergency fund will doubtless be from what you have saved up after your mandatory expenses. To ascertain this saving, you need to create a list of the required payments you have every month.
Saving for an emergency fund doesn’t mean you don’t make regular savings or don’t indulge in what you enjoy. Instead, you need to determine what is left after your monthly allocation of expenses, indulgence, and regular savings is exhausted, and then allocate that portion toward the emergency fund.
List Down Your Streams of Income
Once you have listed down the expenses you have every month; you must also determine the amount of money you earn every month. This isn’t as simple as simply noting down your salary.
If you have any passive sources of income, it is also wise to note down your average earnings from them. This includes market funds, stocks, interest, and rent. This list will allow you to make a reasonable assumption regarding your emergency fund allocation.
Once you have your earnings and expenses listed down, it should be easy to determine the amount that you are saving every month. If you are just getting started with creating an emergency fund, it is not advisable to allocate fund from these savings.
Instead, try and optimise your spending to make space for new savings. Look out for regular expenses that can be avoided and any non-accounted money that is being spent. There is no need to be reduced to austerity, but do make sure you are saving enough for all your future needs.
Start With Small Amounts
You should not try to build an emergency fund within a few months or even a few years. Instead, start adding small amounts to the fund. Set a target date and target amount for your emergency fund. Then, determine the monthly contribution required to reach this target amount by the target date.
The earlier you start creating an emergency fund, the lower your monthly allocation will need to be. This will allow you to save a more significant proportion of your income for other purposes.
Choose Where to Create This Fund
Once you have your fund’s technicalities mapped out, you need to decide where this fund will be based. Ideally, you need an option where the emergency fund’s passive growth is the highest, but the associated risk is the lowest. There are a few options to help you achieve this.
You can opt for a savings bank account. In such an account, the per annum interest you will receive will be constant and ceaseless. There is no minimum or maximum period for which you can keep money in a savings account.
You can also opt for a fixed deposit. Here, the interest is constant and generally more significant than that of a savings account. However, the money needs to remain in the deposit for a certain amount of time.
You can alternatively open a liquid fund account. In such an account, the interest rate is generally similar to that of a deposit, and you can withdraw the amount when you want. However, the risks associated with such a fund are more significant, and the rate of interest is fluctuating.
When you create an emergency fund, the greatest threat in your mind is probably healthcare costs. Bad health can strike any time, and the fees of consultation, hospital admission, and medicines can often be intense. This makes health insurance a significant part of planning for an emergency.
To choose a health insurance scheme, you might need to conduct a significant amount of research. Look for the most extended duration plan which covers the most critical number of conditions. Additionally, check whether the monthly premiums are compatible with your wallet.
Insure Your Valuables
Another type of emergency investment can be getting all valuable items in your house insured. Insurance plans are available for all kinds of items, and you can defer to a financial advisor for information about which items are fit to insure.
Generally, jewellery and stones need to be insured. Your car and any other properties that you own are also insurable, and banks offer several plans for the same.
Decide When to Use Emergency Funds
It is vital that you layout a rigid boundary regarding when your emergency funds are going to be used. For example, if you are going out to eat but fall short of money, you shouldn’t be using your emergency funds. If your landlord evicts you and you need to get loan for moving house, you can use your emergency funds.
Simply having money for a bad weather day does not mean you can use it as a savings account. Instead, collect the funds judiciously and ensure you are self-disciplined enough to use them only when needed.
Here, we learnt how an emergency fund could be created and why such a fund is necessary for everyone.
One must exercise extremely judiciousness in using these funds since they act as a buffer for bad times. The earlier you start collecting money for your emergency fund, the better.
SEE ALSO: Rainy Day Funds: Why You Need One
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