Let me show you why it is important to have an emergency fund is crucial and how you can build your own!
Generally, people set up an emergency fund to cover any financial emergency they may encounter. It’s basically your safety net to avoid financial strain. The purpose is to not create more debt for yourself in these cases.
People typically set aside an emergency fund for:
- Unforeseen Expenses: Like a medical emergency, car expense, home repairs or even if you lose your job.
- Financial Security: This could just be a peace of mind to know you have it for anything that may happen.
- Avoiding Debt: You’re less likely to depend on a credit card if you have money set aside and avoid adding more interest to your debt. Although, it’s better to use your credit card and then just pay it off right away.
- Maintaining Financial Goals: Having money set aside can keep you on track with your financial goals.
It’s best to set aside at least 3 to 6 months’ worth of emergency funds.
How to Build an Emergency Fund
You kind of need to take a systematic approach when setting up your emergency fund.
- Set a goal of how much you want to have in your emergency fund. You can choose the ideal 3 to 6 months or assess what works best for your situation.
- Assess all your monthly expenses, bills groceries, essential, etc. This will help you determine what you have left to put into your emergency fund.
- Create a budget! Include your emergency fund to your budget.
- Start out small. Be realistic with the amount you can actually set aside.
- Set up an automatic transfer to your emergency fund every month. This will ensure you’re accountable.
- Cut out the expenses that are unnecessary and put that money in your emergency fund instead.
- Consider adding extra money you receive to your emergency fund.
- Prioritize your debt repayment while you’re building your emergency fund to reduce the high interest and avoid more financial challenges.
- Keep your emergency fund in a separate account to eliminate temptation.
- Regularly review and adjust as needed for any changes that may occur.
Setting up an emergency fund takes time, but if you stay consistent and determined you can make it happen.