Maintaining your financial stability requires having an emergency fund. Life is unpredictable, and you can never be sure when you’ll need additional money to pay for unforeseen costs like a medical emergency, auto repair, or job loss.
All financial advisors recommend the amount needed for an emergency reserve should cover 3-6 months’ worth of your essential expenses. What does this mean? Make a list of everything you spend throughout a month:
– the needs (rent, mortgage, insurance, utilities, and similar expenses)
– the wants (clothing, dining out, cinema, etc)
– the wishes (savings for trips and other goals)
Now add the 3 together and that’s the emergency fund multiplied by the number of months you decide on.
Because the amount you need to gather in an emergency fund can seem scary big, I’ve created 12 steps to give you a boost of inspiration on how to do it:
1. Start small and be persistent
As the old saying goes, “Rome wasn’t built in a day.” In a similar manner, you won’t build your emergency savings overnight. Start small and make it a point to put aside some money, even if it’s just a few dollars, every week or month.
2. Create a saving goal
It’s wise to have a goal in mind at all times. Set your emergency fund target at the amount necessary to cover at least three months’ worth of spending. You can later on increase it to 6 months.
More than that, after the quarantine, Ramit Sethi, the host of the “How to Get Rich” Netflix special recommends the emergency fund should be worth of 12 months of expenses, considering the unpredictable times we live in.
3. Automate your savings
The greatest approach to guarantee that you continuously save money is to make it automatic. Set up an automated transfer from your checking account or direct deposit from your paycheck to your emergency fund savings account.
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4. Cut off unnecessary expenses
Examine your spending carefully and make any required reductions. Do you really need that Starbucks latte every day? Small cost reductions add up to significant savings.
5. Earn extra income on the side
Look for ways to supplement your primary source of income. Think about starting a side business, selling your old belongings, or freelancing. You can check 21 Side Hustles Ideas to Add $1000 to Your Monthly Budget | 2023, as well as Easy Ways to Make Extra Cash with these 12 Sites
6. Avoid making debt
Only have debt if it is really crucial As fast as you can, pay off any high-interest debt so you may use that money to boost your emergency fund instead.
Be wise with windfalls.
Put any unforeseen funds—such as bonuses or tax refunds—directly into your emergency fund.
7. Be wise with windfalls
If you stumble on unforeseen money, such as bonuses or tax refunds- put them directly in your emergency fund. Instead of dreaming about what you could do with them or buying those brand clothes you wanted, make sure you complete your tasks first, and leave the “wants” section for later, after you’re ensured.
8. Remain disciplined
Although it may be tempting, maintaining discipline will help you avoid using your emergency money for non-essential costs. Keep in mind how vital it is to have a safety net in place.
9. Choose the best savings account
There are a lot of differences among the savings accounts available on the market. To help your money grow more quickly, find a high-yield savings account with a competitive interest rate.
10. Be patient
Do not attempt to quickly accumulate your emergency savings. It is preferable to gradually increase it and prevent financial strain.
11. Review your fund on a regular basis
Monitor your emergency fund and make adjustments in response to any shifts in your costs, income, or way of life.
12. Celebrate your consistency
It might be challenging to accumulate an emergency fund, but remember to recognize your accomplishments as you go. Celebrate your hard work by treating yourself to a small indulgence or a night out. This reward will rewire your brain to think of this task of accumulating this fund from a task to a fun and exciting accomplishment.
So there you have it: 12 guidelines to help you create an emergency fund like a pro. With discipline and persistence, you will be able to build your fund and feel secure in an exciting but unpredictable world. and remember, life is about having fun on the journey, not at the destination.
And remember, becoming a connoisseur in finances will allow you to be in charge of your life. This article is part of our Learn How to Budget Series, where you can learn How to Budget Money on a Low Income? 4 Ways to Save Money