What is an emergency fund and how to create emergency funds?
An Emergency Fund is usually set aside for when you really need it. It is money that will serve to cover any unexpected expenses that may arise on a day-to-day basis.
For this reason, the main purpose of an emergency fund is that you can recover the money quickly and that it is safe. For example, an investment fund is definitely not the same as one for your emergency.
Rule of thumb is to make sure you stick to your financial plan and are dividing things properly. After all, you don’t want to end up at credit counselling. Nor should you mix your emergency fund with the rest of you savings and investments.
The main reason for an emergency funds is to help yourself out during unforeseen emergencies. If you’re looking to buy something like a car or a vacation, well then you shouldn’t use your emergency fund for it. Yes, it would, however, a car repair that you did not plan. In other words, you should use it only for emergencies, not for quick purchases or some fun stuff here and there. Dedicate it for one purpose only. Some people have an emergency fund for their emergency fund.
Do you need an emergency fund?
The answer is yes. When you have money for unexpected things, you don’t have to ask for a loan to cover them. You’ll be prepare do deal with
Stop saving and don’t touch your emergency fund whatsoever. If you save but do not have an emergency fund, it is highly advisable for you to create a separate account right away.
Starting to save is one of the best things you can do for yourself. It is the first step towards building wealth. Once you have saved up money, then you get into investing.
How to create your emergency fund step by step
Now that you are clear about why it is important to have money in the event of unforeseen events, it is time to get down to work. How can you create yours?
The reality is that you need one action to start creating your cash in the event of unforeseen events: pre-save.
So you can start creating your financial cushion automatically:
Step 1: Choose the amount you want to pre-save every month at the beginning of the month for your emergency fund. If you have doubts and would like us to guide you, you have to sign up for the free Financial Freedom course at this link.
Step 2.Order a periodic transfer at the beginning of the month from the account where you receive the payroll to a different one.
Step 3.See how your emergency fund is created by itself and reaches the amount you choose.
If you want, you can complete this pre-saving with a savings challenge to make the process more fun. Here you can see the Savings Challenges that work best.
Once you’ve reached the Emergency Fund you’re comfortable with, it’s time to move on to the next point on your financial journey: using the three blocks of financial planning to get the money.
The money you need for your emergency fund?
The end of the previous point leads us to this question, How to calculate your emergency fund? How much should you save for contingencies? As a starting point, it should be an amount that you feel comfortable and confident with. There is a recommended minimum for the emergency fund that ranges from 3 to six months of your fixed expenses. When in doubt, it is better to stay in the high range of the calculation.
Once you have calculated the fixed expenses, you have and hope to maintain, multiply them by six. So you will know how much you need an emergency fund to help you have bomb-proof finances.
How much time does it take to save your reserve fund?
Normally, generating savings you want takes some time. If you need to know how much, set a time goal for yourself, do some calculations and go from there. You only need to divide the money in the fund by the amount you save each month. Then keep adding on to it whenever you can.
Imagine that you have an income of 1,000 USD per month. Well then save 30% a month and in no time, you’ll have your own emergency fund in just 6 months or so. Or you can keep going.
One of the most common mistakes at this point is to be obsessed with making the emergency fund profitable, in other words, looking to make a profit on that money.
Remember what your main objective is for those emergency funds is to be there when you really need them. If you can get away with making a profit than it’s your call but do whatever works for you.
In this sense, an remunerated account or an automatically renewable short-term deposit will be the best option.
If you already have an emergency fund
Then it’s time to get an emergency fund for your emergency fund. That’s right. It’s time to double down on what you already have going for you. This way, you can set yourself up very nicely for a really long time. A lot of professional investors and financial advisors recommend this right away. Make sure you have a emergency font for your emergency. After all, this is how the professionals do it.
An emergency fund is essential for people to have a nice safe and secure financial future. It’s not for everybody, but people who do have it, report having a really nice peace of mind. So if that’s what you’re looking for, we highly encourage you to check out the concept of having an emergency fund yourself.
We have shared tons of information in this article oh, and truly hope that you can find it beneficial. After all, unless you have an amazing ability to not think about money doing your regular life, having an emergency fund may just give you that advantage.