Imagine a natural disaster such as flood water seeping into your home, destroying every bit of furniture, valuables, etc. everyone around you is worried how will you cope with such great expense and you simply answer you have your emergency fund to support you.
What Is An Emergency Fund?
A fund which you use only in extreme emergency such as financial shortfall when something unexpected happens. An emergency fund is a design to cover and support you when you really need it.
There is always a good way to plan for the future, having
An emergency fund helps you in short-term fall in your career where you have no job, it can cover you till you get your next job. The amount of emergency fund can start by adding small bills but eventually you build it to support yourself; when the actual emergency struck.
Why Do You Need An Emergency Fund?
The simple answer is not always credit card is an answer, the interest rate is high and payback is difficult. You might think borrowing is next good thing but you have to pay back that money too. Or even taking a high-interest loan won’t do the job because you are then just putting yourself in more debt.
These won’t work if you already are in debt or paying mortgage/insurance for your house and car. Hence, an emergency fund comes in handy and serves you well.
How Much Should Be Emergency Fund?
It can vary vastly on how much you make for a living and your day to day expense, depending on that an approximately three to six months of living cost should be covered by your emergency fund. You can start small but start building so that when an emergency hits you, you are well-prepared.
An emergency fund should always be separate from your bank account so that you aren’t tempted to use that money.
What Expenses Should An Emergency Fund Fulfil?
Unexpected hospital visits, huge auto repair, house repair such as plumbing, etc. where the amount is huge. An expected travel where there is a death in the family.
An emergency fund is basically used where your ability to earn is stopped or halted for a while. It is wise to save for the big emergency rather than keep swiping heavy debt credit cards.
What Expenses Should An Emergency Fund Not Cover?
A holiday, birthday gifts, festival shopping doesn’t cover as an emergency.
A new upgrade on TV, new car, your regular payments of mortgage and car insurance are not covered under emergency funds.
Also, much-needed vacation is not an emergency.
Everyone needs to save for unexpected. Having something of your own when you need especially when its money is a stress-reliever. You have to choose whether it is emergency or something that your regular saving can cover.
How Do You Build Your Emergency Fund?
1.Set a goal
Yes, we know maintaining a saving account is what you have been doing but the emergency fund will help you through a tough time where you actually need it. Hospitals bills are huge, it is better to get prepared before the calamity occurs.
2. Use your tax returns
You have earned this with your blood and sweat, why not keep long-term savings i.e. emergency fund.
3. Cut expenses
Well, every article about how to save money will emphasize how everyday small expenses add up to huge credit cards bills. Consider making coffee at home and making more meals at home are some small things you can do to cut expenses.
4. Use your hobby
If you are good at something, never do it for free. If you think you can paint, put up an exhibition and that money can serve you well since it is an added income with your regular job.
5. Loose change
If you happen to get return money as loose change, put loose change in your piggy bank or a jar. It may sound weird that how small currency notes can help build an emergency fund but it is good to start somewhere and you will see how quickly the jar fills.