If there is one thing certain about life, it is its unpredictability. Life can throw pleasant surprises when you are least expecting them. Similarly, it can take a downturn when everything seems to be going right. For instance, a loved one may undergo a medical emergency or your home can get damaged irreversibly.
While there is no way to avoid such curveballs, you can certainly soften the blow. Creating an emergency fund is one such step that can protect you and your family during such testing times. Let’s dig deep into what it is and how you can create your emergency pool.
What is an emergency fund?
It is a part of your savings that is kept aside to handle any sudden or immediate situations demanding cash. This money is kept liquid so that you can access it easily during your times of need. You can consider this money to be your insurance but without any premiums and paperwork.
How much should you save in your emergency fund?
The emergency fund should ideally have three to six months of your income. This money will cover your expenses if you were to lose your job or your house was to undergo major repairs. Having this solid backing will relieve you from the mental stress of arranging money and you can focus on resolving the situation at hand.
However, you must take into account your monthly expenses and other factors to reach this figure. For instance, if you have a mortgage, then it is wise to save six months of your income to avoid any financial woes.
It is also advisable to save more if there is a serious illness in the family. If you are a double-income household and the chances of both of you being unemployed at the same time are unlikely, three months’ income can sail you through this period.
How can you save for an emergency fund?
Your monthly expenses may not leave any room for these savings. You could argue that saving for an emergency fund is next to possible if you are living paycheck to paycheck. However, trust me, your future self will be immensely grateful if you could sacrifice today for a better tomorrow. Here are a few tips to save for your emergency fund.
- Reduce your expenses – There are so many areas where you can cut back and reduce your monthly outgo. For instance, food takeouts and restaurants. You can save up a substantial amount by fixing your meals at home. Another option is to look out for discounts and deals when you step out to shop.
- Lower your interest rates – If you are still repaying your student loans, it may be a good idea to review your interest rates. You can contact other banks and look at the possibility of a balance transfer. This move can help you in saving thousands of dollars in interest.
- Clear your credit card debt – Credit card debt can be a menace and lead you to a debt spiral. It is advisable to focus all your effort and energy into clearing your credit card dues as the interest rates are exorbitant. You may look for a balance transfer card to accumulate all the debts into one place. This way, you won’t have to keep track of multiple debts and their last payment dates. If you shop around, you may find a card with an introductory offer of no APR for the first 12 or 24 months. It may take a while but you can save a few hundred dollars this way.
- Hustle – Look for a second job if you have a couple of free hours in the day. You can register as an Uber driver if you have a car. If you have a special skill like writing or designing or software testing, you can freelance to make some extra money. There are several websites where you can register to bid for projects.
Where should you save your emergency fund?
Your emergency fund should be liquid so that you can access it during your times of need. The best option is to save it in a separate bank account and touch it only during emergencies.