Consider a situation where you lose your job or suffer serious accident: would you be prepared to handle to handle the immediate financial implications? Having a financial safety net to fall back on can mean the difference between a quick recovery and years of instability. Success doesn’t happen by accident; and having a plan for those emergency situations is a way to ensure that you secure your day-to-day life and avoid the hassle of borrowing money from licensed moneylender.
So what is an emergency fund?
An emergency fund is any amount of money that you set aside for situations such as sudden disease, accidents, vehicle repair, bills, and supplies. Individuals who have a comprehensive health insurance package to cover medical expenses are better equipped to handle medical emergencies; however if you lose your main source of income you’ll need another options.
Ideally, an emergency fund should be enough to cover a few months of expenses including food, transport, and utility bills. In addition, the money should be liquid and easy to withdraw at a moment’s notice – it is recommended that you keep your emergency fund in a savings account so that you can access the money quickly. Some people choose to keep the money in the house, but this isn’t always a good idea because there’s always the possibility of losing the money or losing access to the house (for instance in case of a fire or flood).
If you keep the money in a fixed deposit account you run the risk of facing harsh penalties or losing accumulated interest for withdrawing. Property cannot act as a emergency fund because it takes a long time to find a buyer who’s willing to pay the right amount. If you choose to sell property to raise money in an emergency situation, then you’re likely to sell at a loss.
Benefits of having an emergency fund
The main benefit of having access to relief funds is that you’re able to bounce back immediately with minimal impact to your everyday life. Additionally, you’re able to avoid the hassle of repayment in case you took cash from a money lender. Emergency loans tend to have a higher interest rate than regular bank loans and that means you could end up spending months trying to raise money to pay your creditors.
The good news is, if you save money for a rainy day, then you can reduce the amount of time it takes for you to get stable; and you can avoid the discomfort of asking for help from family and friends.
How to set up an emergency fund
Not all of us have the same enthusiasm when it comes to saving money; however, with practice you can learn how to make it a part of your routine. Here’s how to get started:
Have a plan for your expenses
At the start of every month, write down a detailed plan for expenditures and include everything from food to insurance payments, and put the remaining amount into your savings fund. You can decide how much you want to save but ideally the more you save now, the more equipped you will be to handle financial obligations in the future.
Download a budgeting app to help track your expenses
You can make significant progress by using apps to monitor your expenses, especially if you’re prone to overspending. Budgeting apps allow you to compartmentalize your expenses and they assist with planning so that you have a clear budget for everything you need. They also send you notifications when you reach or exceed your savings targets, and also when payments are due. Some of the most popular apps are GoodBudget, Toshl, and Wally.
Set up an automated savings plan
This is useful for individuals who struggle to save money. By using an automated savings process, you never come into contact with your salary: instead, a certain amount goes straight into a separate savings account and it’s much harder to withdraw. Use plans such as the Savings Goal or GIRO to create an automated process that will eliminate the pressure of handling your income.
Find more ways to earn money
If you have a limited income, you can find ways to increase your earnings in the short term by taking up odd jobs to supplement your monthly expenses. This is a good way to make up for additional expenses especially if you’re starting your first job.
Create a long-term savings strategy
Some people choose to save smaller amounts over a long period of time, while others prefer to sacrifice a great deal over a short period. Both methods are viable but it depends on personality and existing financial obligations. If you’re comfortable surviving on ust 50% (or less) of your income, you can make serious progress in just one year. If, however, you prefer a more durable savings plan, then 10-20% should be enough to get started. Bear in mind that it might take much longer to save a decent amount of money.
Put all your bonuses into an emergency fund
This is one of the quickest ways to set up an emergency fund. If your job allows you to get regular bonuses, then you have an opportunity to save without severely impacting your quality of life. For a period of time, funnel all your bonuses into a savings account until you reach the right target.
Find other ways to diversify your income and savings
Consider setting up more than one high-interest savings plan with the right financial institutions. Remember, it is absolutely important to have an emergency fund, but how much money you decide to save depends entirely on you. Also, everyone tends to have their own system for saving money; so create one that works for you. The good news is, by setting aside money for emergencies, you will learn to save by default, and that is essential if you intend to attain financial freedom.
Talk to your friends and family members and encourage them to start saving early to avoid getting into financial trouble. Also, learn as much as you can about saving and creative ways to earn money.