How To Establish An Emergency fund?

An emergency is something which affects your ability to earn money and your health. That can cause sudden and unavoidable need of significant amount of money to overcome the situation. Unexpected or unplanned emergencies may arise any time in anyone’s life, but if you are ready, it makes a lot of difference to get past this hard time.

An emergency fund is that money set aside in a separate bank account to cover unexpected expenses that can be substantial in volume.

As Petersen says, the primary objective to establish emergency fund is safety, not return.

In such cases you may want to borrow money from your friends or family or take bank loan to overcome emergency situation, like a huge hospital bill. That can significantly hurt your economic situation or it can also affect your relationship with whom you borrowed if you can't return the money on time. An emergency fund helps to avoid borrowing on high interest and having peace of mind.

Take the steps discussed below to build your emergency fund.

Take Baby Steps in the Beginning

You have to set some number as a benchmark of the emergency fund, and it usually is a 3 to 6 or 6 to12 months expense as per the recommendation of financial experts. Start with small goals and gradually set long-term objectives.

The Place to keep your Emergency Fund

In the beginning, at least for three months, you should keep it in a savings account with a high rate of interest from where you can get the cash quickly and easily anytime. Later for additional funds, you can give a thought to a fixed deposit, flexible deposit, recurring account etc.

It’s better not only to keep the emergency fund in a separate bank account other than the account you use daily but also in a different bank.

Remember, if it’s out of sight, it would be out of mind until you need them.

Set a Goal of Monthly Savings

The first thing you should do after receiving your take-home pay every month is to deposit a certain percentage straight into your account an emergency fund. The automatic deposit on payday or direct deposit with employer also helps. For eg. Start saving only 1-5% of your monthly income and start depositing in a separate savings bank account. You can ask your employer to deposit some money in different bank account as well, so instead of one you will have two accounts.

Get Additional Income

Be creative to build your fund faster by putting some extra effort to earn some extra money or saving tax refund or cutting expenses. Check out our post on earning extra income here.

Continue Building the Fund

Do not stop after reaching your long-term goal that you started. Circumstances may change with marriage or birth of a child, and your expenses might increase and the amount saved maybe not sufficient enough to cover the current need. So continue watering your flower, i.e. continue depositing.

Bottom Line

Consider emergency fund as an insurance policy. Use the fund only for an actual emergency, not for incidental expenses and most important hope that emergency never happens. Stay safe, stay happy.

Read our featured post on how to achieve your financial goals in 2019.

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