How To Build An Emergency Fund
Everyone needs to save for the unexpected. When there is no reserve fund, anything unexpected becomes an emergency which then most people turn to use their credit card to finance the situation.
What’s an emergency fund?
An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a devastating illness or a major expense. Therefore, the use of a credit card is totally avoided when one has an emergency fund set up.
What’s not an emergency?
• Holidays, birthdays and other unplanned entertainment activities for yourself or significant others.
• A great deal on something you don’t need.
• Expenses that aren’t surprises, like car insurance.
Draw a line between savings for emergencies and savings for anything else.
“One of the first steps in climbing out of debt is to give yourself a way to not go further into debt,” says Liz Weston, NerdWallet columnist.
To start building an emergency fund, consider these questions.
How big should my emergency fund be?
The exact answer to this depends on your financial circumstances and how much insurance you have, but a good rule of thumb is to have enough to cover three to six months’ worth of living expenses. This can give you enough time, for instance, to find a new job or supplement your unemployment benefits until you do. But anything in the bank is better than nothing.
Start small, Weston says, but start.
Where do I put my emergency fund?
Since an emergency can strike at any time, having quick access to your cash is crucial. Consider a Bank Savings Account. Since the money will be safe and you’ll be able to withdraw it without hassles. This should be a separate account from one you use daily so you’re not tempted to dip into your reserves. Remember to create a separate account on your current Bank account and avoid additional Banking fees.
What steps do I take to start an emergency fund?
• Set a monthly savings goal. This will get you into the habit of saving regularly and will make the task less daunting. Contributing a small percentage from your salary for instance, is one way to do this. It is advisable to set your initial target low. Many peoples set a gigantic goal for their emergency fund and then find that it’s very hard to get there. Eight months of living expenses is an enormous goal, one that will take years to reach – and along the way, you’re bound to get discouraged. Therefore it is very important to set a reasonable monthly saving goal and increase as you go.
• Keep the change. When you get R1 or R5 change after paying for your groceries, drop them in a jar at home. When the jar fills up, move it into your savings account. Teach your kids or family members to do the same.
• Tidy up your Cheque account. If there’s money left at the end of the month, just before the next pay day (which is very rare in real life, but if it does happen) move some into your emergency fund.
• Save your tax refund. The average refund is in the hundreds, which can give a good boost to your emergency savings. The tax session for 2017 started on 1 July 2017 and the deadline is 30 January 2018 for e-filers. When you file your taxes, consider having your refund directly deposited into your emergency account. I think this will be easier as you would have not made any plans for your tax refund because you don’t know how much you will get. So whatever amount you get, no matter how big or small, it must go straight to your emergency fund.
• Cut back on costs. If you’re falling short on saving, see which parts of your monthly spending you can cut. Some ways to do this include carpooling, cooking meals at home, saving leftovers and avoiding small daily purchases like take-aways. I’m always amazed at how much money I save from avoiding buying take-aways especially during lunch at work
• Negotiate for lesser Insurance premiums or switch. Shop around for better car and home insurances. I did just that a few months ago. I found a cheaper car insurer online and just before I could sign up for it, my current insurers offered me an even better option (I told them I was leaving due to finding an insurer with lesser insurance premiums, so they offered to beat that premium so I could stay with them). I’m happy to tell you that I’ve been saving half of what I was paying before and the excess amount has decreased by 65%. True story! Try it.
Pick either three, four or all of these tips and see if they will not make any difference towards your monthly savings and keep doing them. Obviously, when you do have an emergency, tap that fund. Don’t put your car repair bill (that is excess from your insurance) on the credit card. Keep living a financially stable life by planning ahead.