Money Matters, Simplified.
8 Simple Steps to Build Emergency Fund
Every now and then, life has a way of throwing nasty surprises our way. Having an emergency fund stashed away is one way of being financially prepared to face the unexpected. The Money Times guides you on how to build one.
Wed, 01/12/2011 - 16:06 by Sandhya Joseph
An emergency fund is one way of being financially prepared to face the unexpected. Having an emergency fund is being financially ready to deal with unpleasant events that occur occasionally in everyone’s life.
When to Use the Emergency Fund?
You can use the money from your emergency account:
-To cover living expenses if you lose your job.
-To cover medical bills when someone close to you has met an accident.
-To cover medical bills when faced with a serious unforeseen health condition that requires immediate medical care.
-To cover home repair or remodeling costs.
-To deal with reduced family income due to death of an earning spouse.
The emergency fund should contain an amount sufficient to cover three to six months of living expenses.
Building an emergency fund takes time. Usually, it cannot be done overnight. So be prepared to save consistently for years when you set out to establish your emergency fund account.
Also, remember that you need to have easy and immediate access to this account whenever the need arises.
Stocks and property holdings generally do not make for great emergency resources. This is because it takes time to liquidate such assets and turn them into cash that can be used to pay bills.
When trying to set up an emergency account, it is best to start a savings account at your local bank. Once you get into the habit of saving, you can begin to diversify.
Here are a few tips to build your emergency funds:
1. Start a Savings Account
Invest in it consistently and resolve to withdraw money from this account only in case of unforeseen emergencies.
2. Garage Sale
Sell any item in your house that you no longer need or use. Deposit the money from the sale into the account designated by you as the emergency account.
3. Bonus, Tax Refunds and Gifts
Perhaps the organization you work for offers its employees a Christmas bonus. Perhaps you occasionally receive tax refunds.
A relative or friend might gift you some money on your birthday or anniversary. Do not spend this cash. Instead deposit it in your emergency fund account.
4. Reduce Expenses
Reduce your day to day expenditure by small amounts. You do not have to deprive yourself. But moderation is the key.
Find little ways to reduce expenses. Instead of ordering pizza three times a week, order it once. Instead of buying your favorite magazines every month, join a library.
5. Automatic Deduction
Set up a savings account that automatically deducts a certain amount from your paycheck every month and transfers it into your emergency fund is also one way to build funds for unforeseen situations.
6. Refinance Loans
Check out refinancing deals offered by various organizations. Look around and research the market interest rates.
You will save a substantial amount through reduced interest rates if you manage to find the right kind of loan/mortgage refinancing deal. However, be sure to read the fine print before you sign anything.
7. Part-time Job
Consider taking up a part time job if you have a little free time available. The money you earn can go into your emergency fund.
8. Extra Change
Save the coins and dollar bills left over from shopping. Do what our grandmothers did with spare change.
Put the coins in a jar and the dollar bills in a neat envelope. At the end of the month deposit it in your bank account.
Managing to save even twenty-five to thirty dollars a month is a good deal when you are starting out.
Gradually when ‘saving’ grows to become a habit, you will be able to take an objective look at your lifestyle and come up with other ways of finding money for your emergency fund.
