The future holds uncertainties. That’s why it’s always better to be ready than not. If you’re taking your step to financial freedom, then you probably have heard of the term “emergency fund.”
An emergency fund is a type of savings that is the total of your 3 to 6 months worth of salary or living expenses. This fund is designed to financially help you in case of unwanted scenarios like accidents, hospitalization, or job loss. This is why it’s very important to build your emergency fund before venturing on investments like mutual funds, stocks, or even building a business.
Seeing its importance, we created this article to provide you with four simple steps on how you can build your emergency fund:
Track your expenses.
The first step in starting to save your emergency fund is to make sure that you track your expenses over the three following months.
- Get an average of how much money you spend on your bills, utilities, food, hobbies, and other wants.
- Check if there are any expenses you can cut out from your list.
- Once you figured out those expenses, set aside the money you use for them for your emergency fund.
Decide where to keep your money.
Your emergency fund should be accessible anytime, and anywhere. So choose where you can keep your emergency fund safe and easily withdraw, such as the following accounts:
- regular savings account
- tax-free savings account
- high-interest savings account
Set aside your savings.
Income – Savings = Expenses. Make sure to save a specific amount of money first when you receive your paycheck before anything else.
Here are certain techniques that can help you:
- Open an auto-debit savings account and set the debit date on your salary days. An auto-debit savings account will automatically set aside a specific amount from your regular savings account on specific days.
- Transfer money on a different savings account regularly by weekly, bi-monthly, or monthly.
- Move a set amount of money from your savings account to another.
Be patient, there’s nothing wrong in starting small and taking little steps. Make sure, to begin with, what you can afford. Just be consistent with your contributions, and over time you’ll build your emergency fund as a healthy reserve.
Here are some tips to help you:
- Have discipline.
- Stick to the same amount.
- Avoid unnecessary expenses.
- Be smart about how you spend your money.
- Talk to a trusted financial advisor.
Last but not least, once you built your emergency fund, make sure not to spend it on any wants. Be honest to yourself, and use that money only in case of emergencies.
After building your emergency fund, don’t stop saving and start growing your money instead. Diversify your money by investing through mutual funds or stocks. But don’t forget to secure your income and your family’s future by getting life insurance.