The term “emergency fund” refers to money put aside in case of financial distress. An emergency fund means creating a safety net to support you when meeting unanticipated expenses.
Having an emergency fund means a reduced reliance on credit cards and unsecured loans in case of an emergency. So let’s see how to build an emergency fund today!
Understanding Emergency Funds
Statistics and opinions may vary, but most financial experts agree that an emergency fund should hold anywhere from 3-6 months of your salary and expenses. Note that your emergency fund and your savings are different.
However, the size of the fund depends on several factors, as listed below:
Living in a big city makes it easy to live an extravagant lifestyle. Usually, such a lifestyle means you won’t be able to save. Savings habits should be instilled in children from a young age. This habit has several advantages, including helping you plan for a better future and stabilizing your financial situation.
Having debts is not a sin. However, you need to know how to manage your debts wisely. Did you have those debts because of productive or consumer activities? If your debts have piled up, you might not have enough money to build an emergency fund. Make sure your justification for having debts is legitimate.
To build an emergency fund, you should prioritize your expenses and eliminate unnecessary items. For example, reduce eating out by cooking more. Gaining control over your expenses will help you reach your savings targets more quickly.
In life, we all have liabilities. Financial liabilities may include mortgage or rent payments, insurance, tuition, staff wages (driver/house helper, etc.), and so on.
How to build an emergency fund?
1. Set a goal
You don’t have to immediately aim to build an emergency fund by setting aside three months’ income. Try to aim for one month or even two weeks. After completing that goal, you can raise the bar for the next ones. The motivation you receive from achieving your first goal will encourage you to persevere in the long run.
2. Automate your savings
To help build an emergency fund, create a dedicated bank account for this fund. Then, set up an automatic deposit of the amount you’ve decided to set aside every month. It’s better to create a savings or other type of account that is not as easy to access as a checking account, so you won’t be tempted to use it for other than emergency reasons.
3. Regularly monitor progress
Remember that when you build an emergency fund, you create a fund that you can use quickly in case of unforeseen incidents. It would be best if you stopped making contributions to the account once you’ve accomplished your main initial goal. Start making deposits into another account—ideally, your retirement account. Not only can the account generate income on its own, but time will allow it to produce the most.
4. Celebrate your success
After building an emergency fund, it’s time to celebrate your hard work. But don’t spend the fund on unnecessary things. So pat yourself on the back. You’ve come this far with your own will and power!
Example of an emergency fund
Let’s say your monthly expenses are RM5000, including loans, credit, car, food, and utility bills. Using the 3-month rule, you should have RM15,000 in your emergency fund for a rainy day. But to be completely safe in case of a recession, add that to your monthly salary for three months.
So, if you have a salary of RM8000 a month, when you build an emergency fund, it should look like this: RM8k x 3 + RM 5k x 3 for three months = RM39K.
Things to avoid when saving for an emergency fund
The fund comes first
Don’t have large ticket expenses when saving for your emergency fund. Before spending, try to save at least 10% of your monthly income. If it’s not possible, try 1% or 2%, depending on how much you earn. Over time, you will see the money grow.
No big spending
During this process, you should hold back from buying a new car, a house, or getting a new credit card. If it’s not essential, then it can wait.
Everyone should build an emergency fund. We must make the distinction between an emergency fund and your savings. Maintaining financial stability in the short term can mean the difference between staying out of debt and surviving a financial crisis. This fund is for unexpected expenses, such as hospital bills, accidents, or an economic downturn.