Read below and learn how to create an emergency fund and gain some financial freedom.
How much should you have as your emergency savings?
You should have a goal of having between 3-6 months of your living expenses. You might think this is a lot of money, but keep in mind that this refers to the “basic living expenses”. This is the minimum amount you need for housing, food, transport, and core utilities. Now it sounds more attainable.
When most people are living a nice and rosy living because everything is going well, they usually get comfortable and spend a lot of money on things they can do without. When it comes to your emergency savings, you only have to focus on things you cannot do without. You only need to budget for essentials for life and survival.
You need to remember that the emergency fund can be broader than your living expenses. It is also about things that can come up that might force you to spend some money on them.
If you have a 10-year old car, you have to think about major repairs because they will be coming soon. This means you have to factor it into your emergency savings and make a savings plan that you are going to use to save.
When you have this savings plan in place, such emergencies are going to be just mere inconveniences.
If you are getting started, set milestones to make it easier and keep you motivated. Start by targeting $1,000 then increase it when you reach that goal. This amount is enough to cover basic emergencies and also a good amount to have when you want to pay down your high-interest debts.
Emergency savings for singles
If you are single, the more you save the better, so make 6 months your goal. When you are single, it means you have to rely on yourself in terms of finances. You don’t have someone to fall back on when things go downhill.
For married people
If you are in a relationship or married and you have a second income you can fall back on, you can have a 3-month goal then target 6 months when you reach your goal. You are allowed to start with 3 months because there is a very small chance that both of you lose your jobs at the same time. The more you can save, the better it is for you. Having 12 months of savings is one of the best ways to get peace of mind, especially during economic uncertainty such as a recession.
How can someone build an emergency fund?
3-6 months of expenses seem like a lot of cash, but starting by saving little is going to add up and you will reach your goal in no time. The money you are saving is to be used for food, housing, and transportation. It doesn’t include non-essentials and things you can do without. If an emergency comes up, you can use the funds then replenish them later. Below are some ways of building up an emergency fund:
Set a target amount
You need to calculate how much you need to save. The easiest way of doing this is by calculating 3-6 months of your essential expenses. The essential expenses are housing, medical expenses, food, transport, etc. Let’s say your monthly living expenses add up to $2,000. You need to multiply this amount by the number of months you are targeting. This means your emergency savings accounts should have between $6,000 and $12,000. This is going to cover your living expenses for between 3-6 months. It is better to do this than to find out what a long term loan is.
This can seem like a lot of money, but calculate the amount by looking at your basic expenses. Instead of a big goal, break it down into smaller goals. You can start by having a goal to save $1,000 towards your emergency fund. This goal is not that hard to achieve and you will be done in a short time. Once you have reached this goal, your 3-6 months expenses is going to be easier to reach. You can make it a goal to save one month’s expense, then two, then three, until you reach your goal.
Building savings into your budget
If you want to build your emergency savings easily, then make sure you make saving part of your budget. Set aside a given percentage of your income and put it in your emergency savings. You can choose to set aside 10-15% of your pay or a set amount like $100 a week. Another easy way to save is to live below your means. When you include savings into your budget, you are going to grow your emergency savings and you will have something to use for emergencies and unexpected events.
Automating your finances
You are going to be tempted to spend money instead of putting it into your savings. The best way to avoid this is by automating your finances. When you automate your finances, your savings deposits and bills are going to be deducted automatically. You can choose to have automatic deposits through your employer to your savings account. You can do it through your bank. This ensures that the cash reaches your savings account. Automation makes things easier because you don’t even have to think about it.
Saving refunds and bonuses
When people get bonuses or tax refunds, they blow through it instead of using it to grow their emergency savings. Instead of using the money to shop, consider putting it into your savings account. This is going to create a fund to cushion you when things are not going according to plan, e.g. losing your job. Save your bonuses and tax refunds instead of racking up high-interest debt and having to borrow from friends and family.