What is emergency fund, why you need it, how to build one, etc..?
April 7, 2022
What is emergency fund, why you need it, how to build one, etc..?
Emergency fund can be a huge succor for unexpected exigencies, unplanned expenses and unforeseen circumstance that requires urgent and necessary financing/spending.
What is an Emergency fund?
Let me put it this way, emergency fund usually is a bank account carefully set aside to carter and fund unexpected expenses in one’s life, these expenses includes but not limited to,
- Car fixes
- Survive during a period of unemployment
- Cater for emergency medical expenses
- Replacement or repair of home appliances, etc..
Emergency fund compounds of money being kept away intentionally, which you can use during financial distress. Overall, emergency funds arises with the sole aim to create financial stability and security for oneself.
Necessarily you should understand that,
- Your emergency fund should be build to see you through a period of 3-6 months in spending
- This fund is your safety cover in case of unforeseen circumstances like (car fixes, survival during unemployment, emergency medical bills and major home repairs).
- Your emergency fund should be housed in an account that’s easily accessed when in need of such fund
- You are at liberty to use tax refunds to build up your funds
- If you are looking to build a robust fund, you may have to consider working for an employee who encourages emergency savings.
Why do you need emergency fund?
Human life cannot be void of unforeseen circumstances or expenses, you should not live your life like birds in the air. The Ants even work in colony to fend for themselves not to talk of human who are supposed to make adequate preparations for their future needs.
If you build a good credit you may not need to fall back to credit cards or high interest loans, this fund ultimately helps you to avoid borrowing since you’ll fall back to this fund at the appropriate time.
One important propeller of emergency fund centers around losing one’s job or staying through a period of unemployment.
The fund set aside here should be able to carry you through three to six months at least to weather your financial storms.
How to build an emergency fund
Building a safety fund should stay on your top priorities, given how it gives you a comfortable future against unforeseen circumstances.
Kindly see the below recommendations on building a formidable safety fund
1. Form a habit to set aside a specific amount from your monthly salary
Where else do you expect to raise your primary income, from your day job of course. You work for a living, a unique purpose that must be instilled to accommodate every aspect of your life that needs money.
There’s a popular practice where employees set automatic debit transfer into their safety funds at source.
Essentially, you should calculate your living expenses then make necessary deductions to save in view of an uncertain future. Be proactive to building into increasing your emergency funds monthly.
2. Save your tax refund
Saving your tax refund can boost your safety fund account, consider depositing your refund into the emergency account when you file for a tax refund.
3. Adjust your contributions
It will be necessary to re-evaluate after several months to see your savings progress , make necessary adjustments if need be.
If you recently withdrew money from your safety account you will need to commence savings aggressively to make it up.
As rule of thumb, if you have saved enough to cater for your emergency through a period of six months, it may worth investing the additional funds.
How much should I save in the emergency fund account?
Essentially, individual living expenses varies, but you should strive to make up at least $500. On the uphill, considering your living expenses you should save through at least six months expenses.
If I am living on a paycheck how do I build emergency fund?
This may appear the most difficult thing to consider if you are living on a paycheck, worst case scenario you should strive to get something out of your paycheck no matter how little.
You should personally decide on keeping a certain percentage where the least possible, you may go for 1% or 2% of your paycheck, literally what matters is that you have something on the side note no matter how little.
When in financial distress you can start your funding requirements/journey from the little in your emergency savings account.
Emergency fund examples
Illustration: If Mr. Wallace is an employee of Amazon who earns $20k on monthly basis status, he is expected to set aside a percentage of his monthly salary in his emergency account.
He may choose a $5,000 monthly stash away to fend for himself in times of real uncertainty which are usually in the future.
If his monthly living expenses is pegged around $5,000 then he may just arrive at his safety fund in six months ($30,000). Where you achieved the threshold, it’s advised that you should start investing the excess going forward.
Given this, he is expected to save for his living expenses in projection across three to six months, there’s no definite bar for everyone, however, ensure to save funds that could see you through living expenses across six months worst case scenario.
There are employers who support employee savings for emergency, in this case your account is being debited at source for the safety fund.
Where should I keep emergency fund?
- Keep your emergency fund in a savings account with high interest rate and easy access.
Like the name sounds, emergency may occur at any given time, there’s no need for delay in accessing such fund. This account should be separate from the bank account you use on daily basis so as to avoid dipping into your safety funds unnecessarily.
- Keep it in a high-yield savings account
This is an account insured for up to $250,000 per depositor in case of eventuality, now it is safe enough to house your emergency funds. Despite accessing your cash with relative ease, the money deposited earns interest.
Emergency fund caters for future unforeseen circumstances like, medical bill, out of employment, major home repair, car fixes, etc..
The fund needs to be raised/build to secure one’s future and mitigate against unforeseen danger. The amount raised should span across three to six months of one’s active living expenses. This fund can be made up through salary by setting up automatic debit from one’s account to the safety account, tax refund can form a pool of this fund.
Raphael Orji is a freelance writer, professional blogger and a content marketing consultant. I work with small businesses, startups and entrepreneurs in building their brand image with high quality blogging and content marketing strategy.
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