Having an Emergency Fund is a necessity! It is a shock absorber for the bumps of life that come every so often. Emergencies and unexpected expenses can strike when you least expect, and it’s for this reason that saving money in an emergency fund is essential for your finances.
It’s time you start an emergency fund kit. This will save you a whole lot when that need arises. However, the biggest challenge of everything in life is how to start. In our case, we want to learn how we can start the first-ever emergency kit.
Here are some practical tips you can do to start your first emergency fund kit.
Understanding What exactly is an emergency fund
In case you may be wondering what an emergency fund is, then to bring it to more perspective, an emergency fund is the cash you’ve saved up for the sole purpose of helping maintain your everyday life as you navigate through an emergency such as a job loss or an illness.
Without it, you are likely to end up borrowing money or neglecting your existing payment obligations, all of which can drive you into serious debt.
- Get your finances in order.
Yes, you need to know your financial landscape. Figure how much you spend each month on mandatory living expenses and any debt obligations that may be paid regularly.
What does your expenditure in a month look like? Where do you need to make changes in terms of where your money goes?
How well do you manage your funds? What is your significant cash flow?
Having a clear scope of your monthly net worth will give you an idea of how you will start and maintain the momentum to building up that emergency fund.
Once you know your total expenses for each month multiply the number by 3 to know how much a 3-month emergency fund would be. Reaching that number should be your initial goal.
- Set up a separate account for your Emergency Fund
Now that you have gotten your finances in order, it’s time to set up that emergency fund literally. My advice would be, the savings account should be a high-yielding account like a money market fund.
The reason for the high-yielding account is so that your money can be multiplying regularly. It makes sure your well never runs dry in one way or another.
Setting up a separate account would mean a new commitment and a new direction to some of the money you get. A different account will help you stay organized in a way.
Having a separate Emergency fund savings and personal account should make it easier for you to keep track of how you channel and spend your money.
- Budget to be making consistent contributions.
The emergency kit savings account is now up and running. The next step is to make sure you have a budget for consistent contributions per month.
Ideally, you should treat it like any other recurring bill that you must pay each month. This kind of mindset will push you to be making that consistent contribution.
For anyone who would want to make the process easier, they can consult with the involved bank on how to automate the process. Once your payment gets to your bank account, an automatic set deduction is done and transferred to the emergency fund account.
In case you wouldn’t like that, then you can write up a plan on how you will be making the deduction and save it. That means you need to be disciplined when you choose this way of making contributions.
Either way, the main point is to make sure you have a working budget and plan that will help you be making consistent deposits to your emergency fund account.
If you have never had a working budget before, you can get one here
- Pay yourself first and make it automatic.
When you “pay yourself first,” you automatically set aside money for your financial goals as soon as you get paid. That way, money goes straight to your savings account and any other investment accounts first.
To make this automatic, set a standing order with your bank account. This will help you to save first and not as an afterthought. The easiest way to save money is to never touch it in the first place.
Once this money is safely in your savings account, you won’t be tempted to spend it on all the other things that tend to crop up.
This is very beneficial since you will not be having to deal with the problem of debating how much you will be saving. Not having to think about it at all will not tempt your money discipline.
It is always good to be on the safe side.
- Take advantage of any windfall money that you get
Windfall money is any money that you have earned extra that is not part of your basic income. It can be gift money, extra income from a favour you gave one of your friends, etc.
If you are hoping to build this emergency fund as fast as you can then you may need to consider this course of action. Keep in mind that is your goal you can take advantage of the windfall money.
This is money that was not counted on as an inflow since it’s money you weren’t counting on as part of your monthly budget, then it’s very easy and flexible for you to use it to get closer to your saving goal.
- Save more when you make more.
For the sake of being on the safe side, make adjustments to your savings as you start climbing up the ladder of your income.
What I mean is, if you make more then purpose to save more. It will help you get to the saving target at a faster rate too.
Now, once you have hit your 3 months emergency fund target, then you can get to the 6 months target then to the 12 month target progressively.
Be intentional when you are planning to use your emergency fund. Purpose to use your emergency fund for serious emergencies only, not all inconveniences. Treat it as your insurance policy for worst-case scenario situations.