How to Build an Emergency Fund?
Tags: Personal Finance, Emergency Fund, Saving, Finance

How to Build an Emergency Fund?

Learn about the ins and outs of emergency funds, helping you to understand their benefits and how you can set one up for yourself. Read on to find out how you can protect yourself from future unpleasant surprises. Depoway Nov 26, 2020·3 min read

Unfortunately we’re not guaranteed to glide through life without an unexpected hiccup or two. Sometimes, the problem is something a bit more fundamental, like a job loss, a natural disaster or a health issue. If and when something like this happens, it’ll be a huge relief if you won’t have to worry about your finances.

This is where the emergency fund comes in. This reserve of money contains funds that you’ve saved to cover yourself for approximately three to six months, meaning that if you suddenly find yourself in a difficult financial situation, you’ll have significant breathing space that will help you deal with the important issue at hand.

What are the benefits of an emergency fund?

As we’ve already alluded to, the emergency fund is first and foremost there to alleviate any financial worries you have over the short- to medium term. This can put you at ease and reduce stress in the situation.

Another benefit is that if you come into financial distress, you won’t need to borrow money either at a high interest rate from an institution or even from friends and family.

The process for saving towards an emergency fund helps develop a great life skill in itself as you become more prudent about saving money and building your financial discipline.

In coming to build your emergency fund, you also might come up with a budget of your average monthly expenses. You’ll also be able to understand where you can make some savings and how much you can afford to put aside each month.

Finally, an emergency fund will mean that you don’t have to liquidate or cash out on any other investments that are geared towards fulfilling your long-term financial goals. By having the money to hand, the rest of your financial life can continue unchanged.

How to start an emergency fund

The first thing to do is to understand how much money you actually spend in a month. Take some time to review your monthly expenses (and don’t forget typical entertainment costs) so that you have an overview of where your money is going.

Then, take your average monthly total and multiply that by the amount of months that you would like to cover yourself for. This is your target amount.

Next, looking at your average monthly expenses compared with your income, see how much money you can afford to set aside each month. Divide the target figure by your saving amount figure to see how many months you will have to save before reaching your goal.

Remember, every small contribution towards reaching your target is worthwhile — it may even take a couple of years to reach your goal. This will be worth the time if you ever do come to need use of the emergency fund.

Growing your emergency fund

Once you’ve got your emergency fund in place, you’ll likely have a fairly substantial amount of cash placed aside.

While the emergency fund is there for unforeseen situations, the longer it sits in a cash account, the more it loses money against inflation.

By earning some interest on your emergency fund while still keeping it accessible, you can make sure that your emergency fund grows itself — making sure that it at least holds its value, or even increases it.