You were probably already told that having an emergency fund is a must if you’re looking to become financially independent. And even if that goal seems far fetched, an emergency fund can be a lifesaver. Sometimes quite literally.
Having an emergency fund will give you the reassurance that if any unexpected expense comes up, you will be able to cover for it without incurring additional debt. This can come under the form of a hospital bill, car, or home repairs.
Even if you do have debt at the moment, setting up an emergency fund should be a priority. Here are a few simple steps to follow if you are just starting an emergency fund.
Before starting, it may be useful to create a monthly budget. This way you will have better control over your spending and a better idea of how much you can save each month.
- Decide the goal
The first step is to set a goal for your emergency fund. This is a personal decision, although you’ll find different pieces of advice on how much you should ideally save. Opt for at least three months worth of expenses. If you find it doable, six months are even better. Remember that you can adjust the goal as you go.
- Open a dedicated account
Ideally, have a separate bank account for your emergency fund. You can either open a regular savings account or a money market account. A money market account is a government-insured deposit bank account that allows you to earn interest on your savings. You’ll want your emergency fund account to be easily accessible but dedicate just to this purpose.
- Decide how much to save
Now that you know what is your goal and you have a dedicated account, it’s a good idea to decide how much you can save each month. It may take some time to reach your goal but it’s important to be consistent. Decide a minimum and aim to add that sum or more each month. Even saving 10$ a month is better than nothing so try to stick to that minimum.
- Set up automatic transfers
To ensure you’ll always save that minimum amount, you can set up automatic deposits into your emergency fund account. This will ensure that a set sum will go directly into your savings account on a certain date each month. You can set up the automatic transfer right after you receive your salary, this way you don’t need to worry about manually depositing the money. You can always add anything extra that you manage to save at the end of the month.
- Only use it for emergency
Now, this rule is important. Once you deposit the money into the emergency fund account, you’ll only withdraw in case of a real emergency. A new pair of shoes will likely not qualify as an emergency unless you’re completely out of shoes. Forget that you even have that account unless you’re in a critical situation.
These are the steps to set up the emergency fund but building it up will certainly take some time. Be patient and consistent and you’ll reach your goal. Just knowing that you have a safety net will give you some peace of mind.