How To Build Your Emergency Fund
Many don’t plan for an emergency and when it hits they are in a frenzy.
Without the disposable income to cover the unforeseen emergency, they rely on their credit card to bail them out. This habit sets all your plans backwards and you budget out of whack.
The average North American is spending more money than that they are earning today. Let’s discuss how to start and grow your emergency savings.
Your emergency fund should be liquid. Not tied up in the equity of your home. Keeping your money at home under your mattress isn’t ideal either. You also don’t want your emergency fund co-mingled with the money in your normal checking or savings account. Keep your emergency fund separate and clearly defined. Open up a savings account, it can be a high interest savings account, and designate it as your emergency fund. Money goes in and doesn’t come out. You want relatively easy access to this account.
You also want to make the contribution to this account automatic. Set it and forget it. It’s been said that those who set up regular automatic savings save more than those who do it manually. The same would apply for your emergency fund. Set up automatic transfers and watch it climb. Out of site and out of mind.
If you spend with cash, any loose change you have you can add to the emergency fund account. The same would apply for your checking accounts. At the end of the month, end of the week, or if you’re really ambitious, end of the day, any extra funds that you didn’t use that was part of your budget, transfer over to your emergency fund account and watch it grow. It all adds up.
Your budget will inform you of how much you’re able to put away strategically and stress free. Your emergency fund is meant to provide peace of mind, not stress. That being said, if you don’t know how much you can be putting away, this is when you need to re-visit your previous bank statements and determine where your money is going. What are you spending money on that is a complete necessity and that of which is shear wanting. Getting clear on this will allow you to start building an emergency fund if you aren’t already and determine how much you’re able to comfortably put away.
The goal is to have 3 – 6 months of your monthly income put away. Understand you are building towards this and doesn’t need to be done in one month. If you put away 10% of your income into an emergency fund monthly, you’ll have 6 months saved in 5 years and 3 months saved in 2.5 years. Keep this fixed and assess your budget frequently. Any extra funds you come across put into this account as mentioned above and you’ll have this in no time.