An emergency fund is money saved for use in periods of financial challenges or downturn. It is meant to serve as a safety net in case an individual loses his/her job, or the economy takes a downward turn, or he/she falls into some hard times and needs quick cash, among others. Mostly made up of cash or highly liquid assets, emergency funds reduce the likelihood of resorting to options like high-interest debts, unsecured loans or even dipping into your retirement funds, among several others.
How do you build an emergency fund?
Before you decide to give in to the adverts of wealth management companies, it is essential to know the steps to building an emergency fund. You should know that the fund is subjective to factors such as financial situation, lifestyle, expenses, and even debts being serviced. The consensus is that the amount to be set aside should be between three to six months’ worth of salary/income to cover the same duration’s worth of expenses.
The rationale, according to reviews gathered from people on ReviewsBird.com is that the amount set aside should keep the individual afloat for some time while he/she tries to stabilize financially. Here’s how:
- Save a percentage of your monthly income. This might seem easy until you consider how the modern man is accustomed to credit-facilities, thereby working to service past debts and lacking the capacity to save. Ways to make saving easy include automatic transfers, standing orders, and investment in financial markets.
- Save any refund, excess, or spare money. This also means that you need to learn how to budget and monitor when the excesses such as unexpected income or tax excesses to divert them to your rainy-day fund.
What categories of people need an emergency fund?
- You need an emergency fund if you only have one source of income. If money comes into your pocket only through one avenue, how do you survive when that avenue is blocked? Or how do you survive if you decide to marry, have a family, invest, or even have a vacation?
An emergency fund can serve as a net to dip into if you ever have the opportunity to venture into activities that can improve your livelihood. Even as you try to diversify, we advise that you do not venture into a high-risk investment without a safety net in place.
- You need an emergency fund if you are unable to claim an unemployment benefit, which mostly happens to independent contractors and self-employed members of the public. Instances like when business is slow, or when the contract ends, among others, should spur you to steadily establish and grow your safety net funds.
- You need an emergency fund if you own a home, as there will come a time when you need to cover the cost of repairs and/or remodeling, whether planned or not, and such situations gulp down money.
- If you have any medical issues, you need an emergency fund. Note that you might already have insurance to cover you, but an emergency fund ensures that you have access to financial aid when your insurance is not within reach, they do not cover the whole payment or if any other unexpected circumstance occurs.
- You need an emergency fund if you have dependents – wife, children, parents, or people. If there are people you have to come through for financially, you need to build an emergency fund.
- An emergency fund can also serve as a goal-oriented fund: when you separate your savings from your emergency fund, you are twice as covered to pursue whatever dreams you have.
Everybody needs an emergency fund, in reality, but if you fall into any of the categories above, you need to get started fast if you don’t have one yet or become more committed if you already do have one.