Nowadays our society is built up on the money spending, so a lot of people are living from one pay check to another without thinking about tomorrow. Only some of them put a little amount aside for savings. Unfortunately, not a lot of people set aside money for emergency fund. They either never heard about it or simply think that it is not needed, because financial crisis will not strike it in the nearest future.
What is an emergency fund?
First of all, what is emergency fund? It is money that is set aside and helps out with unexpected situation that might occur due to the lack of money. This is almost as a “piggy bank” to which you always can have access in case of losing the job, making the
house repaired or medical issues. As you know, all these emergency situations occur unexpectedly, so it is a great idea to have emergency fund (EF) instead of relying on loans or credit cards, which might give you some troubles with debts in the future. For example, some countries might not give the lowest income loan.
Obviously, you are curious how much money you should put aside to your EF. First of all, the amount has its variety among different people. It depends on the needs, but according to the people specialised in these funds, you should have enough to cover from 3 to 6 months of living expenses. It might sound a lot, but actually it would be helpful, especially, having a huge family. You should always make a plan for the worst cases, for instance, if 2 out of 5 family members would lose the job. Then you will be always prepared for extreme situations and all the expenses will be covered easier.
However, not all people have enough money from their salaries to set aside for 3 to 6 months upfront. Even if the salary is not that high, putting aside couple of coins after a month can grow to amount that is enough to pay the electricity bill for couple of weeks. Try not to stress out too much and start having EF now. For instance, start from smaller amounts and then increase it to the maximum you can do. It will not only create you an emergency fund, but will develop a great habit, which can help in the future within the finances.
It might look as a waste of time, but actually it could have saved many jobless people who became homeless. So, let’s start to think strategically now and build a better world. We know that it is said that you need to live today, but let’s not forget the finances, which these days are the foundation of a better living.
How to build it?
The most important fact to know is to not touch the money from EF without any special situations. Otherwise, it might become a habit to take small amount for new shoes or clothes until nothing will be left. So, if you will keep the money in EF then it will be beneficial even with having a lowest income loan. Also, try not to borrow the money, because it will drag you back to the debt. Set a goal to become financially free and start from it. If really needed, try to consult with experts, who know about how to proceed on EF. These are the Step-by-step process for EF:
1. Make a plan on how much you might need
Experts of loans, funds and others recommend to save from three to five months of salary, but if your income is higher, then you can set aside even more. Since everyone have different needs, determine the number by yourself.
2. Make a review of your budget
See how much you spend each month to live. For example, how much you spend on the bills, food, car fuel and other important living aspects. Do not include the stuff that is not necessary – such as restaurants or fun activities.
3. Review the budget
Try to mark what expenses you can reduce or even eliminate, because it will help to put aside more money to EF. For that you might need some previous bills or receives.
4. Review critical expenses
For instance, having lowest income loan it already makes it as a critical expense, which cannot be avoided.
5. Make reasonable conclusions
Take a small step back and take a look at the number you have got. If it seems too high, try to go back to the budget review and see what you can reduce more. It definitely has many different scenarios and all of them can work out. The main point is to determine exact amount and plan ahead. In addition, you could do three months up front, by making different plans for each.
6. Conclusion on the budget
Once you finish the whole list, multiply monthly total by a minimum of three or nine months. The result will show how much you need for three or nine months in case you would loose a job. Obviously, the amount might shock you, but it perfectly defines the real life, which sometimes might not be the way we want. Also, this kind of EF method might help you to save up for a dream vacation or a long term rental car.
Another great advice would be to have EF in cash, because ATM and payments with credit card doesn’t give the right value of the money. However, sometimes it is a good idea to keep it in a bank as savings. Or you simply can think that it is somebody’s else money and you could get in trouble while spending it.
To conclude, EF is important financial step that can be taken into consideration from early age. With little bit of planning and responsibility, it can not only manage your unexpected expenses, but might bring joy by going out of the debts or buying that dream travel destination ticket. Once you will start the EF, it will become easier to live.