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How to Build your Emergency Fund?



"Your Emergency Fund is not an investment, it's insurance with one purpose- to protect you and your family" -Dave Ramsey

Introduction

Have you ever lost your job unexpectedly? Perhaps your car broke down or your refrigerator quit operating. If the continuing coronavirus epidemic has taught us anything, it is that an emergency can hit at any time and there is nothing you can do about it other than being prepared. If you are not prepared for these unexpected events in life, you may find yourself in debt. How do you go about your life and meet your essential expenses in times like these? The answer lies in building an emergency fund that could help you sail through.

What is an emergency fund?


An emergency fund is a fund that should assist you in carrying on with your life and meeting your necessary costs without resorting to last-minute unexpected loans, overusing your credit card, or selling and mortgaging your current assets. One of the pillars of excellent personal finance is an emergency fund. This is the first step in ensuring your financial future, even before you begin investing.

Financial freedom is not attainable without an emergency fund. There are far too many variables that may devastate your money along the road. It's impossible to predict when you'll need money to cover living expenses because this cash reserve is specifically for the unexpected. When you have financially prepared for an emergency, you have solved the financial component of the problem before it arises. To help you avoid starting over with your financial objectives, here's everything you need to know about how to build your emergency funds 

Expected and Unexpected Expenses

 
People frequently find themselves in financial difficulties as a result of failing to plan for crises. The easiest way to prepare for them is to save money. Expected costs are those that you know will occur on a weekly, monthly, quarterly, or yearly basis.

Some of the examples of Expected expenses include groceries, the electric bill, fuel bill, taxes and insurance.
Unexpected costs are ones that you did not anticipate. Here are some of the examples :

  • Emergency home expenses (your roof is leaking, etc.)
  • Your car breaks down (and it’s your primary mode of transportation)
  • Job loss
  • Medical or dental issues 

How much should one save?

The first step in creating an emergency fund is determining how much money you can realistically set aside each month. The amount you should have in an emergency savings fund is determined by your circumstances. Consider the most frequent types of unexpected costs you've encountered in the past and how much they cost. This may assist you in determining how much you want to set aside. You may then select how much you want to put into your emergency savings or investing account based on your budget.

How to Build Your Emergency Fund?

Set a target date

Setting a target date might help you accomplish your objective more quickly. Set a deadline for reaching your emergency fund goal based on your present financial circumstances. It might be three, six, or even a year. Instead of aiming for three months' worth of costs straight immediately, aim for one month. Whatever it takes to make your initial objective appear achievable because reaching your first objective might provide you with the desire to continue. Set your second aim even higher — and your third goal even higher. Saving will have been a habit by then, and the positive motivation you're developing by accomplishing smaller objectives will drive you toward greater ones.

Start with small, regular contributions

Set yourself up for success from the start. Set your starting contribution level to something reasonable. That way, you won't be tempted to leave your savings habit since you won't be stressed about your cash flow. Find anything in your life that you can live without or with less of — for example, cut back on your monthly coffee habit a little. Commit to saving it on a regular basis: once a month, once a week, or once a paycheck. The goal is for it to become a habit rather than a periodic battle.

Take Stock of existing assets

You may already have some assets that may be used to finance your emergency fund. It might be additional cash in your savings accounts, or some fixed deposits that aren't tied to a specific purpose, among other things. You can put part of the money into an emergency fund.

Automate your Savings

The simplest approach to saving money is to never spend it in the first place. Set up a separate account for your emergency fund and have your selected contribution amount deposited automatically by your company or bank. you may choose how much and how frequently you contribute, but once you've set it up, you'll be making continuous payments to your savings. Rather than a checking account, use a savings or other sort of account that you can't readily access. You won't have to worry about it and you won't lose the money this way. When you do this, you are far more likely to save. Also, consider setting up automated notifications or calendar reminders to check your balance to help you keep attentive.

Manage your Cash Flow

Your cash flow is simply the time when your money comes in (your revenue) and goes out (your costs) (your expenses and spending). If your timing is incorrect, you may find yourself running out of money at the end of the week or month, but if you actively watch it, you'll begin to identify chances to modify your spending and savings. While it may be tempting to spend it, saving all or a portion of it might help you swiftly establish an emergency fund.

Keeping your Emergency Fund

What do you do now that you've gathered the necessary funds for your emergency fund? Well, we suggest some ways that will help you park your emergency funds.

Cash is the king

When it comes to dealing with crises and emergencies, nothing beats liquid cash. Keep it in cash, so when you need it, it’s there. However, keep in mind the safety concerns as well as a zero return on a significant amount of available cash
Banks. If you have a bank account, which is usually regarded as one of the safest locations to hold your money, it may make sense to have a separate account where you may retain and manage these funds.

Short-term fixed deposits

If you are concerned about spending the money you have saved in a savings account, you can create a short-term fixed deposit with your bank. Before creating a deposit account, it would be beneficial to read the terms and restrictions if you choose this choice.

Do you have a high tolerance for risk?

It is commonly believed that one should not invest your emergency fund in volatile assets.
Once you've established a “healthy” emergency fund, you may begin investing the extra money you've saved after paying off debt. Investing in other assets such as real estate or the stock market, or actively investing or Investing for passive income, on the crypto market can be some investment possibilities.

Investing in your emergency fund is an aggressive strategy. Sure, there’s an upside, but a lot could go wrong too. The stress of dealing with a volatile market in the short term, plus the cost of some unexpected catastrophe, might be overwhelming.

Conclusion

An emergency fund functions similarly to a parachute, saving you from a freefall in the case of a financial catastrophe. As a result, always give it the attention it deserves. It is a good idea to examine your emergency fund requirements at least once a year, as there may be changes in your life.

The purpose of keeping emergency savings in cash is obvious: You want it to be available when you need it. The market could crash the same day you get fired, after all. And if your emergency fund were invested in the market, you’d have to sell at a loss to make the cash you need available. For many, that’s not a risk worth taking.

But you may have a different outlook. Maybe you could invest your emergency fund and maximize those earnings, without destroying your chances of surviving an unexpected financial challenge? You could also take the middle ground, by splitting up your emergency fund between cash and investments. And, the money you can afford to invest should go to the stocks…. or Digital Assets.


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