It is always best to be prepared for any financial catastrophes that you may be involved in by building an emergency fund.
Life is uncertain and unexpected emergencies may happen to anyone in the form of sickness, major car or home repairs and the most common case, unemployment. An emergency fund is a savings account where money is set aside to cover these emergencies.
Without an emergency fund, you are most likely to use credit cards or borrow a high interest loan to meet these unexpected expenses. This goes against the goal of being financially independent which involves climbing out of debt and not going further into it.
Here are the steps that you need to follow to create an emergency fund -
1. Calculate your monthly income and expenses. Know the difference between fixed and variable expenses. Cut down on any variable expenses such as entertainment, shopping and other things that you may do for leisure. The goal is to increase your savings, but if it isn't possible to save a big amount, start with a small amount.
2. Create a monthly savings goal along with a goal for your emergency savings account. Your emergency fund should normally include enough money to cover a minimum of 6 months expenses. This number can be higher or lower depending on your financial circumstances. Need a freebie printable to help you track your expenses and savings goal? Subscribe to us!
3. You may have loans and credit cards that need to be paid off; use the savings towards the payment of debt as well as the emergency fund. Look at expenses that you can avoid such as subscriptions or gym memberships that you do not use and increase your savings. Find useful tips and ideas on how you could save more money here.
4. Use a piggy bank or a jar and collect coins and other loose change that you may get from daily transactions. When the amount collected reaches a certain number, transfer it to your emergency fund.
5. Look for ways to increase your income through part-time, freelance jobs or start something of your own as a side hustle. If you are good at something and have the knowledge and skills, you can provide them to others and get paid for it. Find useful tips and ideas on how you could make extra money here.
6. You can also make the process a lot easier by setting up an automatic transfer from the account where you receive your paycheck to the savings account each month. Calculate the amount that you may need for your emergency fund and decide on a proportion of your paycheck to end up in your savings account.
7. Instead of a savings account you may also use a money market account or short term certificates of deposit. They give you a higher rate of interest as compared to a savings account. However, they may not be easily accessible and at the time of an emergency, a quick access of these funds is required which is why a savings account is preferred.
The Ultimate Guide To Getting Your Finances Back On Track is a book that aims to help the user in being smarter about their finances. This guide contains seven sections - Financial Goals, Expenses, Savings, Income, Loans & Debts, Budgeting, and Investments. Each of these sections explains everything you need to know about Personal Finance in simple terms. By the end of this book, you will have learned the fundamental principles that will help you in maximizing your income, decreasing your expenses and increasing your savings that will overall kickstart your process of truly building wealth.
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