Good question, but eh… what is an emergency fund?
An emergency fund is money you save to help you pay for any unplanned costs and financial emergencies such as medical bills, car or home repairs. The contribution can be large or small as long as it is money set aside to help you through a tough financial period.
I have a savings account do I really need an emergency fund?
Having an emergency fund is not the same as having a savings account; rather, it is also a subset of a good long-term financial plan. The aim is to build a fund with at least 3-6 months of income to cover any unexpected expenses. Unexpected being the key word. So, yes you do need an emergency fund as well as a savings account and here are six ideas to help you create one.
1. Work out your vitals: what are your vital bills each month? It includes all the non-negotiable bills, for example, medical, family support, food, accommodation, utilities, and transport. Calculate this figure and use it as a base to determine the size of your emergency fund.
2. Calculate your excess: Conduct a financial review to determine how much of your monthly income remains after covering all your expenses. This number represents the money you can use for savings, investment, or an emergency fund. Split the excess into three parts, not necessarily equal ones, and distribute. Do note that your regular savings isn’t an emergency fund.
3. How much? Set a goal using the base figure mentioned in point 1 above. The size of the contribution to the goal each month doesn’t matter; what counts is the consistency of allocating even a small amount to reach your goal. Use a standing order to ensure your contribution goes to your emergency fund account on the day you are paid. In fact, use any method to help you save automatically.
4. Where to stash the cash: an accessible savings product is ideal, as you would need easy access in case of an emergency. Shop around to see which bank or building society offers the best rainy-day accounts. Check interest rates and ensure the account does not incur unusual fees, such as withdrawal or account maintenance fees
5. Create guidelines: write some guidelines on when you will use this money. What constitutes a financial emergency? Can the emergency be otherwise resolved? Not every emergency will warrant access to this account.
6. Replace what you use! If you have used it, then be sure to refill the pot.
Hopefully, you will not have many financial emergencies, but in the event of one, you will be ready. Use the resources shared below to help you on your journey in creating an emergency fund. Good luck!
Resources:
-Emergency savings – how much is enough?
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