Five Simple Steps To Building An Emergency Fund
There are times during everyone’s life that unexpected events and circumstances occur which may threaten their financial well-being. From job loss to serious health issues to property theft and an economic crisis in your country, anything can happen at any time. In case of any troubles, you should have a so-called financial cushion, otherwise known as an emergency fund. Let’s talk about how to build it in order to stay calm during a financial crisis.
- Determine the size of the cash reserve. According to analysts’ calculations, the amount of a reserve fund should exceed your monthly spending of at least 3-6 times. If you suddenly lose your job, this fund will keep you afloat for three to six months. At the same time, the amount of a financial parachute should not be too large since you can use and invest this money to make even more of a profit.
- Decide how much to save monthly. It’s believed that you should save approximately 10% of your income. Of course, the amount may vary depending on your current situation, but at least 5% should go towards an emergency reserve. You can allocate more funds from your budget at the initial stage. Ideally, it shouldn’t take more than six months to build the desired cash reserve.
- Pick the form of an emergency fund. Your reserve fund must be comprised of liquid assets. Liquidity determines how quickly you can turn assets (deposits, securities) into cash. The most liquid asset is money that you keep in a safe or have on a bank card. However, cash is too liquid and you can be tempted to spend it on something you don’t really need. Therefore, the best solution is to keep your emergency fund in a bank.
- Choose a good bank. Remember, you put money in a bank not because you want to get a high income (which is always accompanied by risk) but to create a financial cushion. Which bank instruments to choose from – deposit or a current account? The most beneficial option is a short-term deposit. Many banks offer 30-day deposits with automatic prolongation if you do not withdraw money. Such deposits are very convenient. On the one hand, you can benefit from an interest rate, on the other hand, your money is very liquid and you can use it as soon as you need. Keep in mind that an emergency fund should not incur your additional expenses, so it’s best to choose a bank with optimal features like prepaid debit cards, no domestic and foreign fees, and get paid early options. Do your research and you’ll find that many banks are looking to help you out before making a profit.
- Make a contribution. The most optimal option is to make a deposit on a payday. Otherwise, by the end of the month, there may be nothing left to put in the account or it will be far from the planned amount. However, if at the end of the month if you still have some money left, you can put it on deposit. This will help you to build a reserve fund faster.
An emergency fund is only the first step to financial independence. It won’t solve all your problems, but it can make you feel more financially secure in case of any unforeseen circumstance.