Having an emergency fund, well, saves you when you need money the most. It's not a good to have, it's truly an essential component of financial wellness. Here's everything you need to know about emergency savings funds.
15 min read
We’ve mentioned emergency funds before, but now we’re going to focus on how to successfully get one started and the importance of doing so.
An emergency fund is exactly what it sounds like: cash saved in case of an emergency. This is a separate savings account that you avoid touching unless absolutely necessary i.e. for emergencies only. This shouldn’t be a savings account you use to buy a home, go on a nice vacation, or dip into for a new sound system.
Life happens. You never know what kind of curve ball will be thrown your way so it’s best to be prepared for many reasons. An emergency fund will:
A financial emergency is an unfortunate major life event that requires money right away. These events are unexpected but very possible to anyone which is why it’s important to be prepared for any that find their way to you.
As mentioned before, an emergency is not an indulgence choice. You should never treat your emergency fund as an extra source of cash savings for anything other than major unexpected events. A good rule of thumb is if you have to question if a situation is an emergency or a reason to dip into your fund, then it probably isn’t.
Once your fund is in place, temptation might follow. Avoid keeping your emergency fund linked to your debit card. This should not be an option. You want to avoid tempting access to your emergency fund. You definitely want to be able to access the money quickly in the case of an emergency, but you shouldn’t be lured to spending it on frivolous expenses. Savings accounts linked to your checking account as well aren’t the best options either.
Ideally, you want to set up a new account with another bank. A great option is online savings accounts. These typically earn you a higher interest rate, which will earn you more on your savings. They also have the disadvantage of available ATM’s. This serves as a benefit when avoiding temptation to withdraw cash for non-emergency situations.
The general rule of thumb is anywhere from 3-12 months of living expenses. This means you first need to calculate your necessary expenses for a month. This budget should be much barer than your regular one because you’re focusing on necessary living expenses. You shouldn’t include regular entertainment expenses or eating out.
Start small and adjust as you go. Once you calculate your living expenses and multiply it by the number of months you choose your emergency fund to be able to last, you might get overwhelmed at the amount you have to save. You have to keep in mind that this isn’t saving for an added benefit to your life; think of it as a necessity you shouldn’t live without.
Understanding what an emergency is and where to keep your money is easier than battling temptation. But the hardest part of it all is actually building your emergency fund. It all starts with the right mindset.
This means creating a strict recurring deposit into your emergency fund to avoid falling off track. Don’t just say, “I want to save X amount of dollars a week”. You have the numbers in front of you: how much you make, how much you need to live off of in a month, how long you need to save for. Now break it down and set up automations to ensure your emergency fund gets built. You never know when an emergency will occur, so the sooner you have your fund ready, the better off you’ll be.
The best way to save is to spend less. You can do this by analyzing your spending and cutting out the fat. Successfully saving doesn’t mean putting your life on hold, it means adjusting your lifestyle now to reap the benefits in the future. This includes non-monetary benefits like better habits, more freedom, and less stress.
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If your interest rates on your debts are higher than the rate on your savings account (which they most likely are) you are better off paying off the debts first. This saves you more money in the long run. Pay off your debt first then keep the same practice to start saving.
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Creating additional income streams will help you reach your emergency fund goal much faster. There are plenty of side hustles you can pick up in your free time to earn extra money. Use these to contribute more towards your emergency fund and then keep it going to have that supplemental income afterward.
If you do come into some extra money at some point, go ahead and put it towards your emergency fund. This is money you most likely won’t miss because it was a bonus in the first place. This gets you to your goal that much quicker.
This idea has been around forever; it’s the reason piggy banks were invented. In more modern age, you have plenty of options for apps and services that will help you collect spare change on your transactions and contribute it towards your savings (including paying off debt- Qoins).
If you have any ideas to contribute to emergency funds or want us to cover another topic, comment below!