Here is how to build an emergency fund so that you never have to stress about a debt load again. The fact is the sooner you start saving for the rainy day than the less likely you are to have to come up with some money to pay an unforeseen expense. How to Build an Emergency Fund is really quite easy. Here s how to build an emergency fund so that you never have to worry about an unexpected expense again.
What you first need to do is work out what your monthly savings goal is. This is simply your estimated expenditure over a year. In other words, this is your total expenditure for one year without any source of income at the end of the year. Why you want an emergency fund now. In a nutshell, an emergency Fund is not something that you just tap into whenever you have to pay some bill such as your annual holiday, vacations, your monthly car registration or even your regular dental cleanings.
Your immediate priority must be your current financial plan. If you do not have a household expenses budget you will have to take on debt to finance your holidays. A good way to do this is to set aside 6 months worth of income for one year and tap in as much as you can each month to meet some of these expenses. It will certainly make managing your debt easier.
You should set up a high-yield savings account, such as a certificate of deposit (CD) or an interest-bearing savings account (ISA). This will be the money you will tap into in the event of an emergency. There are many things you should consider, including the time period you want the emergency funds for, the minimum withdrawal amount (typical is around $100 a day) and the interest rate. The higher your interests, the larger your emergency funds are likely to be. You should also consider whether you would like to earn interest from your CD or ISA account.
After you have your investment objectives and your financial plan in place, you should know exactly where to keep your emergency savings account. You should keep it in a place where it is easy for you to access and reach. Ideally, it should be in your home. It does no good for you to keep your fund in a drawer somewhere. If you cannot visit it every day, there is absolutely no use for your money going to waste.
To get the most out of your emergency funds, you should budget the money that you withdraw each month. Most financial experts recommend that you budget at least six months’ worth of expenses. That means that if you spend three months on rent, food, utilities and miscellaneous expenses, then you should budget yourself at least six months worth of living expenses. Keep this figure in mind when you are deciding how much to withdraw each month. If you are living beyond your means, you may only need a month’s worth.
If you are living well within your means, then you should leave a bit of your disposable income at home. This is possible if you do not have a savings account. You could save up to six months’ worth of income to invest in your emergency fund, but you should remember that this should be used to invest only in “safe” low-risk investments. Ideally, you should use your credit card debt to get out of debt, but if you are still struggling to make the minimum monthly payment on your cards, then it is time to cut back on your spending.
If you do not have an emergency savings account, you can start saving money for emergencies now. Start putting a percentage (at least 20%) of your monthly income towards your emergency funds. It might take a while before you see results, but as you continue to follow these steps, your nest egg will grow and you will have more money to save for emergencies when they come along. In the meantime, you will be prepared with the financial information you will need to stay afloat during unexpected times.
