If there’s one thing we all learned during this COVID-19 crisis, it’s the importance of an emergency fund. Having an emergency fund allows us to live at peace, knowing that we’re financially secure and ready if ever a crisis hits (*knocks on wood*).
But first, what is an emergency fund?
Basically, an emergency fund is the money you put aside in cases of emergency. Unforeseen accidents, salary cuts, sudden unemployment — these all require a bit of cushion in our wallets; to be financially secure, we need to be prepared for the worst.
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5 smarter ways to build your emergency fund
1. Have a goal amount
In building an emergency fund, the general rule of thumb is to save three to six months’ worth of your living expenses. That time frame must be enough for you to live comfortably while, say, seeking a new job or recovering from a medical emergency. You can opt to add to your emergency fund once you’re more financially able.
Of course, the amount varies from person to person. If you’re single and have no dependents, then you won’t need as much as someone who has a family to feed. It’s best that you study your spending habits before you set a goal amount.
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2. Plan out your steps
Three to six months of expenses is not easy to save up, so take it one step at a time. Bring out a piece of paper (or if you’re geeky like me, a spreadsheet) and compute your average monthly expenses. See which expenses you can adjust, or which areas you’re willing to sacrifice. Maybe you can downgrade a subscription. Or perhaps you can find cheaper food to eat.
From there, set a fixed percentage of your income that you’ll be adding to your emergency fund monthly. Make sure that you save this amount — whatever it takes. The best way to do this is to immediately deposit this amount into your emergency fund once you get your paycheck. Remember: saving before spending is the way to go!
It doesn’t matter how small you start. As long as you save regularly, you’ll find yourself reaching your goal in no time!
3. Think of alternative accounts
Consider that your emergency fund should be easily accessible in case of emergencies, but not too accessible for you to use it for impulse shopping. A smart way to build your emergency fund is to invest it in a safe, low-risk place that still yields interest.
In my case, I put my emergency fund in a time deposit and a money market fund. Both funds are low-risk yet gain more interest than an ordinary savings account; they also allow me to withdraw money as soon as possible, without any termination costs whatsoever.
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4. Automate your savings
In the era of online banking, automation has become so easy. Set up your payroll account to automatically deposit money to your emergency fund monthly. If you’re unsure how to do this, contact the bank for further instructions.
When you’ve automated your savings, you won’t even have to think about putting your money away. You’ll continue to live within your means and, by the time that you’ll need your emergency fund, you might just be surprised at how much money you’ve saved through the years!
5. Find ways to increase your income
You might be surprised by how many ways you can gain extra income if you try. Of course, this doesn’t mean that it’s easy. But if you have the time and energy right now, try taking some side hustles!
Nowadays, there are several online jobs you can apply for. If you’re not interested in that, maybe do a house cleanup instead and sell some pre-loved goods!
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Saving up for something may seem overwhelming at first; so, build your emergency fund slowly but surely — and the best time to start is now. Finally, gain the financial security you deserve. Your future self will thank you for it.