The beginning of the year is the time when people look back, evaluate the last 12 months, and resolve to make some aspects of their lives better. Some intend to improve their physical health, others vow to kick unhealthy habits, while some want to be more wise in managing their money.
If being financially fit is part of your goals in 2015, building an emergency fund is a must for you.
As its name suggests, an emergency fund is a pool of money that you can use during emergencies or unforeseen events such as getting sick or losing a job. The cash from your emergency fund is intended to pay for your necessary expenses even if you’re in a middle of a crisis.
When you budget, you don’t usually allocate an amount for an expense that you don’t usually expect such as a trip to the hospital or a dryer that has broken down. But when these hiccups happen, how will you pay for them? This is where your emergency fund can come in handy. You can tap this amount during emergencies. It prevents you from getting into debt and protects the other areas of your finances.
As a rule of thumb, an emergency fund should be equivalent to three to six months-worth of your basic expenses. For instance, you spend $4,000 on food, rent, utilities, and other necessities each month. That means that you need to put away $12,000 to $24,000 in your emergency fund.
When building an emergency fund, here are four tips that you need to keep in mind.
1. Keep it Separate
When you budget, allocate an amount that you will put in your emergency fund. Consider it as an expense that you need to prioritize.
Keep your emergency fund separate from the other parts of your budget. Open an account for it so that you can track how much you’re saving. This will also avoid you from accidentally dipping into this fund for other purposes.
2. Get Automated
Automatic transfer is a convenient way of making sure that a particular amount goes to your emergency fund on a regular basis. Because the money is directed to this account, it will grow steadily and you will not be tempted to use it for other expenses.
3. Manage your Expectations
Building an emergency fund is not something you can accomplish overnight, especially if you’re on a tight budget. Expect that it will take months or years before this fund can meet at least the amount needed to cover your expenses for three months. So don’t lose heart if you don’t immediately see a sizable growth in your emergency fund during its early stages.
It’s also important to set a realistic amount that you will put into your emergency fund periodically. Look at your finances and see how much you can save without compromising the other parts of your budget. If you want to save more towards your rainy day fund, you can try cutting back on some expenses so you’ll have more to put away in it.
4. Maintain it
When you dip into your emergency fund, make it a point to return the amount you used. Yes, it is intended for the rainy days and it would be fortunate that you have it during difficult times, but building this fund doesn’t stop at that. You need to constantly maintain it.
Replenish your emergency fund once you recover from a financial bump. Remember that you need to have sufficient money in this account to cover for any other unforeseen events you might experience in the future.
Having an emergency fund is fundamental to financial stability. It offers a safety net as you try to accomplish your other financial goals such as saving for a house or paying for a child’s education. If you want to get financially on track this year, start working on your emergency fund and provide yourself a safety cushion for any financial roadblocks that you may encounter in the future.