The funny thing about life is that more often than not, we should expect the unexpected.
Have you ever experienced last minute changes in your travel plans that lead to you racking up some pricey hotel bills?
What about a major incident on the roof that led to the sudden need for serious home repairs?
Or even some kind of car accident, or illness that hit you out of the blue?
Each of these unexpected life events can come with a very hefty price tag.
If you haven’t been planning ahead then you may be hit with a huge bill that you are unable to pay, leading to debts that have to be paid off for years to come.
Another unexpected event that can hit hard if you are not planning ahead is the loss of a job.
With no contingency plan, losing your job can mean struggling to pay your regular expenses.
The hard financial effects of each of these unfortunate situations can be made better by simply planning ahead and building an emergency fund.
Setting aside money into a special fund on a regular basis can help you cover any major expenses you hadn’t planned to pay for.
And having an emergency savings fund can help reduce the need for credit cards or personal loans that come with high interest rates.
In this article, we will take a more in depth look at why now is the right time to start an emergency fund. Then we will explore how to build an emergency fund.
Why Start an Emergency Fund?
Building an emergency fund is a good idea not only for fending off the potential damaging effects of surprise events.
There are also larger factors in the wider world that make building up your emergency fund today even more important.
These days, we are in a period of global instability when it comes to the economy.
Central banks in the United States, across Europe, and in other parts of the world have rising interest rates.
Luckily, there are tools available. Using an app like Wealthface can help you to protect your investments against the effects of economic instability.
The app offers easy to navigate automatic portfolio balancing, so you won’t have to worry about all of your investments being affected by the current economic climate in the same way.
Instead, you will have a diversified portfolio that can help maximize returns and minimize risks. And those returns can be used as one part of your emergency fund.
How to Start Your Emergency Fund
Make a budget
Budgeting helps you to make the most of your income and keep track of your regular expenses. This is a great first step to building up your emergency fund.
By carefully looking through your regular spending habits, you can find ways to reduce your spending and set aside more to save.
Making a budget also helps you to maximize your income, and get a realistic sense of where your money is flowing through your accounts too quickly.
By looking at a budget that charts your regular spending habits, you can also craft a budget that reveals how much your emergency fund should contain to cover surprise expenses.
Determine your goal
Setting a goal for your emergency fund is an essential way to keep yourself on track.
With an ultimate goal in mind you can determine how much money you need to budget each month to set aside for your savings fund.
Your goal should cover six months of expenses. So take a look at your monthly budget of normal essential expenses, including food, housing, transportation, and any other essentials.
Then multiply this total amount by six. Don’t worry if it seems like a high figure; saving six months worth of expenses will likely take some time.
Set up a direct deposit
Setting up a direct deposit is a great way to ensure that you are regularly setting aside a specific amount for your emergency fund.
Direct deposits are usually used to automatically deposit paychecks into your bank account. But you can also set up a split direct deposit.
A split direct deposit sends a certain amount of money straight into your emergency fund automatically each month.
Then the remainder is deposited into your checking or savings account.
With money automatically being added to your emergency fund each month you can easily keep track of how close you are to reaching your goal.
Take advantage of a new account bank bonus
Often banks will offer special cash bonuses for new customers who open a checking or savings account.
You can use this extra cash bonus to give your new emergency fund a jumpstart, or add it to a pre-existing one.
Gradually increase the amount you save
A smart strategy to help you reach your goal is to gradually increase the amount you save over time.
This increase can be as minimal as 1% more than what you have been depositing so far.
Then, after a specific amount of time, increase the amount by another 1%. Gradually increasing your savings amount will help you reach your goal, but won’t overwhelm your checking account.
Save any unexpected extra income
If you receive any unexpected extra income, like a holiday bonus, a sizable tax refund, or lottery winnings, you should deposit at least part of this extra income into your emergency fund until you have met your savings goal.
This is also the case if you are gifted cash, or if you inherit funds.
Meet your short term goal- and then keep saving for long term goals
Once you have met your financial goal and have saved enough to cover six months of expenses, don’t stop there. Keep adding to your emergency fund regularly.
After all, there are unexpected circumstances that can cost more than even six months of regular expenses, including a lengthy period of unemployment or prolonged hospitalization.
The more you save, the better it will be for you.
As we have shared, starting an emergency savings fund is extremely important.
The best time to start is now. Put your emergency savings fund in a savings account that provides high-yield interest.
That way, the more money you have sitting in the account, the more interest it will earn while you wait.
Keep your emergency fund in a separate account and set up an automatic deposit, so you will not be tempted to dip into it for nonessential spending.
Emergencies happen when you least expect it, so ensuring that you have enough to cover your expenses is the best way to be prepared.