How to Create an Emergency Fund
Emergency fund! The most heard word in the personal finance world. However, what is an emergency fund and why you need it? Emergency fund is nothing but a certain amount that set aside for rainy day i.e. for an emergency. This article tell you all about the rainy day fund and how to create an emergency fund.
What is an emergency fund and why it is used for?
Emergency fund is a certain amount that keep aside, i,e, in a savings bank account or a place where higher capital protection and liquidity available.
Emergency fund can be used to meet higher expenses such as monthly expenses due to an unexpected job loss, an unforeseen medical expense, unexpected home repair or a car repair etc. are the main reasons to have an emergency fund. It can also use to save others too where your immediate attention required.
Important tip: Better usage of the emergency fund is to meet the long time expenses due to a job loss or business failure. ‘Medical, house repair, car fix etc can be covered with relevant insurances.’
Why you need an emergency fund
Having an emergency fund put you financially safe. You will be more confident to face panic situations that required higher amount to solve. For an example, a sudden job loss that stopped your income and you are unable to repay loans and family expenses. If you have an emergency fund in place, such problems can be solved in a great extend.
Tip: You can have short term emergency fund and long term emergency fund too, to meet multiple uncertainties depends on your job, income, lifestyle etc.
How much should you have in your emergency fund
Frankly with short answer, equal to a half year expense.
However, with a recent experience of mine, my emergency fund saved me for more than 2 years due to an unemployment! So I prefer to have at least one and half years expense as an emergency fund.
It is easy to identify how much should your emergency fund have. Calculate the monthly expenses and multiple by the number of months you planned. That would be your emergency fund. Ensure you have not missed any expenses such utility bills, groceries, loan repayments, vehicles services etc . when calculating a months expense.
Tip: Remember to consider your age and skills or type of business when deciding the emergency fund.
Where should you keep your emergency fund
Remember, liquidity is the most important factor with emergency fund along with capital protection. The best places to keep an emergency fund is a zero monthly fee high-yield savings account with easy assess or a savings account with high interest rate. You can prefer couple of best liquid funds too. Wherever it is, capital protection is mandatory. Also, the fund would be available to your hand within less time and whenever required.
Tip: Never put your emergency fund to any risky investment products such as stocks and shares, equity mutual funds etc. The nature of emergency fund should be low risk, liquid and accessible
Finally….
We are into the major topic ……..
How to create an emergency fund?
Here is the easy ways to build an emergency fund
- Monthly savings – Savings is the best option to build the emergency fund slowly. Set aside a money each month to contribute to the emergency fund. If you have a budget, include the amount in that.
- Save the changes – Have a piggy bank and save the bills up to $20 to that. This will then deposit to the bank each month to your high yield zero fee savings account
- Gifts – Save the money received as gifts in special occasions, to your emergency fund account
- Refunds – Save the refunds such as tax refunds for emergency fund
- Part time income – Save a part of your additional income to the emergency fund account
- Sweep account – Sweep your salary account in each month after a particular date to the emergency fund account
- Slash your budget – Slash your budget items and add to the emergency fund. Once the fund is in place, you can lift it back.
- Dividend earnings – You can contribute the investment dividend earnings to the emergency fund
- Profit from sales – If you are selling any item, add the profit to the emergency fund
- Side income – Set a part of your side income from hobbies, part time activities etc to the fund
- Cash back credit cards – When getting your cash back on purchased, contribute that to emergency fund
- Bonus from employer: Bonus from employer is a great way to build emergency fund. Instead of using for ‘waste’ purposes, save it for a rainy day use!
- Cut a weekly expense: This can be such as coffee outside, a movie or any leisure. Cut that and add money to the fund.
- Focused activity: Any focused side activity can be best to create the fund. For example, a painting job in Sunday or a delivery job etc, That earning can use to build the emergency fund fast.
Let me know if you have any questions.