Nowadays, every educated person or even a person with access to the Internet knows about an emergency fund. Everyone understands that it is a must in our uncertain world, but only a few people really put effort into creating one. Lately, the situation has changed, and in 2020 the average amount of personal savings for a rainy day increased by 33% and showed a record value of $8,863 per household.
The recent pandemic outbreak caught many families out of guard and brought a lot of difficulties, including financial troubles. The households with savings for emergency situations overcome this period much easier than the rest of the people. Of course, temporal money issues are not the end of the world, especially now, when $1500 loans are available online, and you don’t even have to leave home to apply. But it’s better to have a safety cushion and leave the loans for the last resort.
The Definition
The emergency fund is the money put away in case of unforeseen life changes and emergency cases. They can be used to pay for repair after a car accident or for medical bills in case of sudden illness. Such savings will help to live through the rough period if you lose your job or face an income reduction.
Specialists recommend having the amount of money allowing you to live at least for six months leading the same lifestyle. You can easily calculate the required sum: take your monthly expenditures, including loan repayments and other necessary spending, and multiply them by six.
Does the sum seem too high? Don’t worry; we’ll give some recommendations on organizing the emergency fund without too much stress and limitations. But first, you should set the goal of saving this money and not taking from this fund before it’s really unavoidable.
According to CNBC data, 25% of respondents don’t have an emergency fund at all, but last year this number was 21%. However, 75% of people have savings, but 26% won’t be able to cover 3-months expenses.
How to Organize the Saving Process
The creation of emergency savings requires determination and discipline. You should work towards your goal without any excuses, following simple rules. So, where to begin?
#1 Set a Goal
You have already calculated the minimum amount of the emergency fund you need to feel safe and secure in all circumstances. Now, it’s time to evaluate your financial capabilities and set a realistic goal for a year. It’s highly unlikely that you’ll be able to accumulate the whole sum in just one year. Think about how much money you can save without too much suffering for you and your family.
Divide this sum into twelve months. Now you know the sum you have to add to your account monthly. By the way, open a separate account to keep these savings or use the special option offered by your bank for this goal. Don’t keep this money on your main account where it will be too easy to reach.
#2 Chose the Way of Keeping the Money
You can prefer other ways of keeping the saved funds other than a bank account. Some people can even choose to have the cash under the mattress. Others think that money should work and find options for investing. Every way can be good for you but remember about one important condition. You should be able to receive your savings immediately in case of an unforeseen situation.
If the conditions of investing imply that you don’t have access to the money for the defined period, it’s not a proper way to organize emergency savings. You can invest another part of your finances, but this money is your insurance. It’s useless if you won’t be able to use it when it’s really necessary.
#3 Chose the Account with High Interest
The previous point doesn’t mean that your fund shouldn’t be as profitable as possible. Find the saving account with the best possible conditions. Yes, the profits will be lower than with investing, but at least they can compensate for the inflation. In any case, it’s better than keeping the funds at home.
Of course, to find the most advantageous conditions, you’ll have to do research, don’t count on your previous knowledge. The pandemic hit the financial institutions as hard as other areas of life, so the interest rates offered a couple of years ago now you can find only in dreams.
#4 Stand Your Ground
Try not to forget about the goal you set initially. Sometimes you can have a temptation to spend the saved money on some purchase or even entertainment. In such moments remind yourself about the purpose of the emergency fund you try to accumulate and leave the money where they are. You work hard to ensure the safety of your family. It’s not wise to spend savings on a new car or something like that.
The other danger hides in everyday temptations. Some months you can think that it’s not necessary to make monthly payments, and you can have a rest. It’s not the best strategy. One month easily transforms into two and then in a year. Imagine how much money you could add to your account during this time and try to stay on track.
#5 Find Additional Income
It’s hard to save money if you struggle to live from paycheck to paycheck. It doesn’t mean you should give up the idea of emergency fund creation. You just need to find additional ways to earn money. Think about what areas of your life you can monetize. I can be:
- your time by having additional working hours;
- your knowledge by giving private lessons;
- your skills by having a side job;
- your hobby by selling your creations.
The common feature of all millionaires is that they can turn everything around them into money. In our life, opportunities are everywhere; we just need to see and use them. By the way, many people reconsider their life at this point and start earning much more they could even imagine.
Summary
Each grown-up person should have savings for the rainy day as insurance. Knowing that you have the funds to live for six months reduces money-related stress, gives you peace of mind and opens many opportunities in life. The creation of the emergency fund doesn’t require special knowledge and extraordinary actions. You’ll just need patience and consistency, and in no time, you’ll have your safety cushion.
