An emergency fund is a savings fund specifically for unforeseen situations, such as a huge medical bill or unemployment. Many experts advocate for an emergency fund that could cover at least three to six months of your living expenses. I have often found myself unable or struggling to meet my financial obligations for various reasons and have learnt the importance of saving for a rainy day. Getting there can however be challenging. Some manage this by taking out secured loans, but others are not in a position to take this initial boost to their income. I also found it difficult to set how much money I should put in or take out at any one point and what counts as an ’emergency’. Here are a few steps that have helped me over the years to build my emergency fund and some suggestions that could help you as well.
When I receive my paycheck, the first thing I do is to set aside the money for my savings, and then I budget the rest for spending. Since I find that I can have several things at a time that I am saving for, I prioritize my emergency fund and put it immediately in my savings account to resist the temptation of dipping into it for something else. Following this rule without compromising has helped me build my rainy day account over the years and every time I see the balance, I feel very proud of myself. I took the step further by automating this deduction where a certain percentage is automatically deducted from my income and directed to my savings account before I access my paycheck.
Another rule I set for myself geared towards building my emergency fund is keeping the change from every purchase and directing it to my savings account. A simple jar at home where I drop in $1 and $5 bills goes a long way. I completely removed the attitude that it’s too little because I found that the numbers do add up after some time.
Another tip that I have found useful to building my emergency fund is by regularly checking my balance and readjusting whenever necessary. This is because emergencies do come up. Since the goal is to maintain at least three to six months of living expenses, whenever I dip into my emergency fund I know I have to recover that money somehow. Also, in case I find that I have reached my desired amount, I either put in the extra money or invest it in something else. The goal is to save and not spend.
Another important thing I have found to be helpful in building my emergency fund is putting it in a high-yield savings account. A high-yield savings account is one where the interest rate is relatively high. This allows the saved money to grow while sitting in the account. There are multiple financial institutions that offer competitive interest rates for savings accounts while still maintaining easy access in case that emergency comes up. Every penny counts!
By following these simple steps, my emergency fund has significantly grown. The best part of it all is the security and peace of mind that comes with knowing that I have a buffer in case my house floods or me or an of my loved ones gets suddenly ill and would have to supplement any health insurance for medical bills. Maintaining the attitude that no money is little money has also helped me improve on how I handle any extra cash that comes my way. So we should not forget to keep those smaller bills and take our time to look at the interest rates that our accounts provider has to offer.