Having an emergency fund is crucial, as things in life don’t always go as planned. So, setting up an emergency fund can help you deal with financial setbacks, such as recession and sudden job loss.
With that said, you will want to understand the importance of having an emergency fund and the essential steps that will help you to reach financial freedom.
Read on to learn more!
What is an Emergency Fund?
An emergency fund is an account where you have saved up a set percentage of money for a minimum of up to six months of your total living expenses. The primary objective of having an emergency fund is to have a cushion in the case of a sudden emergency.
For instance, an emergency could arise if you were to lose your job or your ability to make an income due to a sudden illness could be affected. Nonetheless, we know things in life can happen, and there are only certain things we can control.
Most financial planners recommend that people have at least six to twelve months of savings, and the primary reason for why they recommend this timeline is that you will be looking at how long it could potentially take you to get a new job in the case where you could potentially lose your job.
For a starter, you will want to build up your savings slowly. You could focus on building three months’ worth of expenses first. Once you hit that target, you will want to focus on building up to six months’ worth of living expenses in your account, and so on.
Also, you shouldn’t wait for the perfect time to set up an emergency fund. You will want to start working for it immediately. Even if you are currently at your first job and you got your first paycheck yesterday, you will want to start setting up your emergency fund immediately.
Speaking of setting up an emergency fund, you might want to check out Joywallet, as Joywallet is a great resource to help you with your money-saving journey. With that said, before you start any form of investing – or – before you get into other demanding financial commitments, you will want to prioritize investing in an emergency fund first.
Set a Target
The first thing that you will want to do is to set a target for your emergency fund. The target of your emergency fund is heavily reliant on your monthly income and monthly expenses. To set a realistic target, you will want to set up a budget and realistically and accurately assess your total and monthly expenses.
Suppose you spend $6000 every month, and if you want to set a target for six months, your emergency and target for those six months will be $60000 times six months = $36000. You get the point – initially, this will be the thing that you will be after.
Assess Your Living Expenses
When it comes to assessing your living expenses, you will want to consider your needs and wants. If you have debt and have to pay monthly expenses to settle the debt, you will want to include the amount you pay every month in the calculations for assessing your living expenses.
Keep in mind that you are assessing everything with the assumption that if you lost your job today, your creditor would not care so much about the fact that you have lost your job, which means that you will still be expected to put forth your monthly payments, such as the payments for the car loan or the mortgage.
You will also need to have money for food, transport, and your monthly bills.
It is important to mention here that there is no such thing as an overestimation. You will want to consider both your needs and your wants. And if you have any debt obligations, you will want to include your monthly amount in the total calculation of how much you spend in a month.
Understand that it is Okay to Start Low
If you want to build an emergency fund successfully, you should know that it is perfectly fine to start low. When you start doing the math, there is a great chance that you might get intimidated to the point where you might feel like building an emergency fund might not be for you.
Many people feel discouraged when they realize that they will need to stick to a budget and set aside a monthly amount that will go to emergency funds. At first, it might feel like having an emergency fund is not the practical thing for you to do.
You might feel as if it is an impossible task to save $1000 every month. The question is if you cannot save $1000 every month now, how much can you save? To successfully start and build your emergency fund consistently, you need to give yourself permission to start low.
You will want to ask yourself the monthly question: what can I do with what I have now? It is okay to have an initial bog target but start saving low and contributing less initially to the emergency fund. The key here is to be consistent every month. Starting low never means that your goal is unrealistic and that you cannot achieve it.
An important thing to keep in mind is that you must start saving money now, and you will want to work on your emergency fund now – not later. The worst thing that you can do to yourfinancial wellness is to be lazy about it and to be a procrastinator.
If the last year ended with you saying that you would build an emergency fund next year, and it didn’t happen – then you certainly don’t want the same thing to repeat this year. Start working on your emergency fund now – do the calculation – and set up an emergency fund.
Stick to a monthly budget and remember the two keys to success: consistency and determination.