How to build emergency funds?
emergency funds

How to build emergency funds?

Having extra funds available for emergencies is a critical part of your financial well-being. Having enough money to be able to covering three to six months of expenses is a common recommendation because they can be a huge help in times of need. For many people, these emergency funds can add up to a daunting number – and can discourage even the most well-intentioned saver.

But don't give up before you start! The saving game is mostly psychological - and you can win it. Even if you're starting from scratch, putting money aside regularly, even in small amounts, will eventually help you reach your goal. It just takes time and a little discipline.

If you're ready to get started—and especially if you think you can't—here are some suggestions that might make building your emergency fund easier.

However, building emergency funds is not enough to have financial freedom. So, I offer you our premium training which also allows you to learn how to plan your retirement even when you have a low income. This training also allows you to know how to plan your family budget, get rid of financial stress and many others.

What is an emergency fund?

An emergency fund is a pool of money that you set aside to cover unexpected financial needs. This could include unexpected expenses like car repairs, medical bills, or even job loss. The idea is to have financial security that allows you to handle these situations without having to resort to credit or loans.

Typically, it is recommended to save the equivalent of three to six months of living expenses in this fund. This provides some peace of mind and helps avoid financial stress in the event of a crisis. To build this fund, it is often recommended to put money aside regularly, even if it is only a small amount.

Very often, people who don’t have an emergency fund see the idea of ​​having to save money as a form of punishment—after all, money that’s sitting in a savings account and escrowed is money that can’t be used to live on? You don’t have to completely panic if your car breaks down or you lose your job or suddenly need to replace a water heater. Instead of having to figure out how to put those expenses on a credit card or ask a friend for money to help you out, you can just pay the bill - no worries.

funds

Another problem I hear about a lot when it comes to emergency funds is the temptation people have to spend the money on things that aren’t emergencies. They see they have several hundred dollars in savings and they start thinking about buying a flat screen TV or going on a trip – and that’s exactly what they do.

If you want to have a savings account for big splurges, that's great – start a " madness fund ", if that makes sense to you. It's important, though, to leave the emergency fund completely alone until you need it. Put some money in there and don't even look at the balance until a real emergency occurs.

First steps towards building emergency funds

Set your initial goal low

So what’s the first step? Many people set a huge goal for their emergency fund right away and then find it very difficult to achieve. Eight months of living expenses is a huge goal, one that will take years to reach—and along the way, you may get discouraged.

Instead, a great way to start is to set a more reasonable goal. Make it your initial goal to have an emergency fund of just $ 250 ou $ 500. This is a goal you can achieve in just a few months, and yet it's an amount that can make a huge difference when you have an emergency. Then, break this goal down into smaller chunks. Maybe you can save $ 25 per week.

If so, you may want to have an emergency fund of $ 250 in just ten weeks, so you can make that your overall goal. Maybe you can put aside $ 40 per week, which would bring you to the goal of $ 500 in three months. My advice is not to set your savings plan too high at the start. Whether it's in terms of how much you can save each week or in terms of the total amount. It should challenge you a bit, but not be a figure that's simply unattainable.

Article to read: Everything you need to know about the bank guarantee

Find your breathing space

That's great, you think, but where will I find it? $ 25 per week? I'm barely making ends meet now. This is a pretty typical feeling from people who are just starting to get their financial situation back on track. There are plenty of ways to make extra money throughout the month. Take a look at these strategies: How to make money online.

Ways to Start Your Emergency Fund

Ask for a rate reduction on your credit cards

If you have a credit card balance, reducing your interest rate will directly save you money each month. Simply return your credit card, ask to speak to a supervisor, and simply ask for the rate to be reduced. Suggest that you consider transferring your balance off the card.

Speaking of which, you might consider transferring that balance on an interest-free card for transfers, which can help you pay off that debt faster. Check out this article to find out how you can globally reduce your bank charges.

Automate your savings

Out of sight, out of mind: The easiest way to save money is to never touch it in the first place. Most employers offer direct deposit, and some will even deposit into more than one account. Set up a separate account just for your emergency fund and have your contribution amount automatically deposited, either by your employer or your bank.

Use a savings account or another type of account that you can't easily access, unlike a checking account. Chances are you won't miss it. And don't continually monitor the account balance, that will only make the growth smaller and slower. Forget about it and let time do its work.

Don't increase your monthly expenses or open new credit cards

Once saving becomes automatic, don't lull yourself into a false sense of financial security and let spending increase again. For example, if you give up a new pair of shoes every month only to replace them a few months later with a new monthly shopping habit, you're not saving at all!

If you still have $ 50 plus each month, your savings deposit amount may be too low. If you don't have $ 50 in addition, you may have a credit card balance. Neither is productive.

emergency fund

You shouldn’t stop enjoying life while you build your emergency fund, but you shouldn’t lose sight of its importance either. Having an adequate emergency fund is essential to your financial well-being. Be realistic, but try to reach your ultimate savings goal as quickly as possible. That alone could make life more enjoyable.

Use a shopping list

Ten minutes of planning before you go will save you at least ten minutes in the store, and it will help you stay focused on the things you actually need, reducing your grocery bill because you put less unnecessary stuff in the cart.

Turn one splurge per month

Instead of going out for an expensive dinner once a month, turn that dinner into a home-prepared meal. You'll save quite a bit, even if you're cooking something really fancy in your own kitchen.

Don't save too much

Or, more accurately, don't allocate too much of your savings to your emergency fund. By definition, an emergency fund is money that you can access quickly. That means you're most likely storing it in a low-yield vehicle like a savings account which pays an extremely low interest rate.

For this reason alone, you should stop contributing to this account once you have reached your ultimate goal. Start depositing into an account where it will start earning money on its own – ideally, your retirement accounts, where time will allow it to bear the most fruit.

Set up a carpool

Find someone who lives close enough to you and works where you are and start carpooling together. Even if you can only do it a few days a week, you'll cut down on your commuting costs significantly, and it'll be much harder to stop you for those impulsive splurges.

Use public transportation

Better yet, get into the habit of using public transportation for your daily commute. Most metropolitan areas have surprisingly good public transportation options — and they’re a lot cheaper than driving yourself.

Go by bike

Want to start getting in better shape? Live just a mile or two from work? This is an ideal situation to buy a bike and start using it for commuting instead of wasting money on gas and car maintenance.

Reduce unnecessary monthly bills

Do you have a Netflix subscription but rarely use it? Cut it! Are you paying for premium cable channels that you never watch? Cut them!

Snowflake

Very often, when people receive some unexpected cash, they tend to spend it without thinking about it. They decide not to stop for coffee, but then choose to spend it later on takeout, for example. Instead of spending this “found money,” take some or all of it and put it immediately into your emergency fund. If you have services online banking, It's quite simple: just transfer them from your checking account.

The key here is to actually save those savings. Instead of just spending the money on something else, put that money aside for your emergency fund. If you find that you're saving more than $ 50 per week with these tactics, put more into your emergency fund or increase the amount you put into your retirement savings.

Make it automatic

So you have reduced your expenses by $ 50 per week, but now you have that money and it's tempting to spend it on something more exciting than an emergency fund. You're tempted…

…but you don’t have to be tempted. Instead, you can set up an automatic savings plan to sweep that money right out of your checking account and into your savings account that you use for a emergency fund. If you haven't already, I recommend setting up an online savings account at a separate bank from the one you normally bank with for your emergency fund.

Doing this not only allows you to find a bank with good service and savings account rates, but it also puts the money in a place that isn't so easy to access.

You can't just run to the ATM or stop at the counter and withdraw money - you have to go to your computer, order a transfer and wait a day or two for access to the money, which is more than enough time for you to think carefully about what you are doing and not get carried away by impulse.

How to build an emergency fund with a small income?
How to build emergency funds? 8

Set reasonable milestones along the way

In a few months, you'll hit that first milestone—and you'll feel great. There'll be enough money in that account to start earning some interest, and you'll start to feel in control. Now it's time to keep going. Set another goal : an emergency fund of $ 1 000. Keep that automatic savings plan in place. Once you reach that goal, aim for one month of living expenses. Then two months. Then three. And keep watching that emergency fund grow.

Obviously, when you do it only in case of an emergency, tap into that fund. Don’t put your car repair bill on the credit card. Don’t start living off of plastic while you’re between jobs. Instead, continue to live a financially stable life by planning ahead.

In summary...

You might find it to be a lot of fun. – so you might start looking for other ways to save. Just keep setting goals and keep pushing yourself a little to get there. Before you know it, your life won’t be disrupted by these kinds of emergencies – and you’ll sleep a lot better at night knowing that.

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I am a Doctor in Finance and an Expert in Islamic Finance. Business consultant, I am also a Teacher-Researcher at the High Institute of Commerce and Management, Bamenda of University. Group Founder Finance de Demain and author of several books and scientific articles.

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