How to Build an Emergency Fund

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Emergency expenses usually happen most especially during unexpected times. Whether we are in a crisis or not, expenses will not care about your situation. They will come whenever they want to and it does not matter if we will be doomed. Sometimes, when we are so bombarded with our financial responsibilities to the point that we tend to brush aside the importance of having reserved funds for emergency use. We always have that notion that we cannot save because we got bills to pay, and our income is not enough to have something to be kept in our pocket.

Building an emergency fund could be a very challenging task in financial planning because many people are struggling already when it comes to paying bills and spending on other necessities. This component is often neglected because they do not realize how it can serve as financial buffer once they encounter unexpected bumps of life. However, this could serve as a shock absorber when the time comes that we would be facing financial challenges. Read on to understand it better and learn how to earmark for your emergency fund.

What is Emergency Fund?

To put it simply, emergency fund is the savings dedicated to unforeseen expenses. It is one of the key components of a sound financial plan which could save us from potential loans and debts that could make a bad shot at our financial standing. Again, we are talking about emergencies, so it is meant to be spent for our most essential needs such as medical expenses, car repairs, illness, or job loss to name a few, and not for shopping spree. Having reserved funds also shield us from loans that have high interest rates which can cause our financial stability to sway or worse, to fall apart.

With emergency fund, we will not be caught off guard without having the ways to resolve our misfortunes related to money. Maybe we are not prepared emotionally and mentally to the rocks that life will throw to us, but at least we are financially ready, and this is a great factor to chop off a big chunk of burden in our part once we face those uncertainties.  Also, it will serve as our safety net if ever we will be in a financial crunch. Without it, we could end up swiping here and there for new unnecessary purchases, borrowing money from friends and lending institutions, and any unwise financial moves that could drive you into debt.

To make it clear, emergency fund is intended for “emergencies” which means that a situation needs an immediate remediation through money. It is not intended for purchasing new expensive clothes and bags. It is not reserved for your impulsive buys whenever there are big sales or whenever you want to buy that item with its unreasonable price and out-of-the-budget value. Most especially, emergency fund is not intended for those who want to borrow money and who will promise to bring it back the other day. You build emergency funds for your own sake and not for the financial woes of other people.

Building an emergency fund requires so much discipline because you should not be fragile in giving in to temptations. It also requires sacrifices because sometimes, you have to leave other usual routines just to give way for your savings. Not having enough money to cover up the high expenses could also be frustrating, and it adds up to the emotional turmoil if something unexpected happens. Building an emergency fund is a live-saver because if ever we will be in that unforeseen situation, there is something that we could pull off from our pockets so we will no longer be indebted to other the people.

Where to Use Emergency Fund

Probably you are wondering where you are going to use the emergency fund that you will be building anytime soon. It is a big commitment because you need consistency to fill your fund for future use but it will be worth it once a surprising event came during tough times. To manage your fund efficiently, you may categorize the expenses that you consider as emergencies so that you will have an idea where you could spend your emergency fund. Through determining what constitutes as emergencies, you will have a clearer picture on where you could spend your money when the unexpected circumstance comes. Reserve your funds for the truly important cases including the following:

  • Medical expenses. We never know when we will be having sickness or accident (knock on wood). It is not that we are expecting it but we should be preparing ahead of time before we’ll be helplessly knocked down by the expenses. Even though you have health insurance, you should not be complacent because it cannot cover everything so better have a buffer to avoid unwanted debts with high interests. Securing money for health emergencies is one of the wisest moves when it comes to financial planning because those were inevitable and could happen to any member of the family regardless of age.
  • Unexpected loss of income. A sudden cut-off on source of income may create panic because it could mean that there would be pending bills and will make your bank account totally exhausted. When this happens, emergency fund would be your perfect lifeline to help you survive for the first few months while you are still looking for a new job. It will help you pay the most essential expenses such as utilities and daily necessities such as food.
  • Property expenses. If there is something that is needed to be fixed in your home, you do not have to loan for that major repair. Even though we say that we are taking good care of our house, unexpected events could still occur such as natural disasters. We know that we cannot control the damage that they may cause so it is better to get ready for the possible structural risks that would opt us to shell out large amount of money from our bank. Since house repairs require immediate action, we will be able to avoid settling to quick loans which put up high interest rates.
  • Major car repairs. Whether we met an accident or the car malfunctioned due to careless use, it is a relief if we have reserved funds for car repair. Car insurance, just like the health insurance, does not cover everything so whether we like it or not, we really have to use our own cash to save our car. Repair and maintenance are too expensive so we really have to save some for this kind of emergency.
  • Funeral. This might be an uncomfortable topic but we need to be in touch with the reality that we could not live forever. Securing money for funeral could also be considered most especially if we have family members who have illness and are already aged. Of course, death is inevitable and even though not all people are prepared for it, better yet be prepared with the possible expenses for funeral services and other extra expenses during the wake and burial. We must always be open to this possibility because as much as we want to avoid it, we cannot get away from it.
  • Purchase of necessary equipment. When you feel that your gadget or an essential equipment is about to give up, it is much better to include it to your emergency fund. No matter how expensive it is, time will come that it will malfunction and will lose its essence. It is good to have funds for immediate replacement to avoid inconvenience in our part. Some of the possible items are furniture and appliances, as well as personal computer and gadgets necessary for work and school.
  • Sudden essential travel. Some might not realize this, but it could also be included to your reserved funds because you could possibly have an urgent business trip which requires you to bring out stash of cash to fund your daily expenses, accommodation, and travel expenses. This could also happen if you have to visit a family or relative somewhere far from home.

How Can I Build My Emergency Fund

After identifying where to use emergency fund, let us now answer the question on how to build it. It is easy to say how important it is and where to allocate the savings but what is hard is to plan on how to start and how to maintain it. As you experience financial setbacks, you have to realize more how essential it is to save funds for emergency use because it saves you from distress and other worse conflicts in the long run. If it takes you to sacrifice your financial goals such as new car, planned getaways, and purchasing expensive items just to give way for your emergency fund, then it will be worth it. Here are the ways on how to build yours.

  • Find extra income. If you are worrying that your income will not be enough to save for emergency funds and at the same time juggle it with your regular expenses, then it is time to find for extra money. If there is an opportunity or a means to earn more money, then grab it. Extra income helps a lot in building your fund. While having your regular job to get through expenditures, you also have your side hustle to fill your emergency fund.
  • Cut off your expenses. You have to be dedicated when you are saving money so you also have to limit your expenses most especially if you do not actually need them. Some things that you might want to cut off or limit are monthly subscriptions, groceries, eating outside, shopping, and purchasing unnecessary items. Try calculating what you have been spending monthly and eliminate those things that you can live without. The money you could save from the expenses that you cut off must go directly to your emergency fund.
  • Check your budget regularly. Calculate your income and track your expenses so that you will have an idea how much money you are producing and how much you are spending in a period of time, let us say for a month. Through this practice, you will be able to determine if your spending is still reasonable or if you are already crossing the line. Losing track of your expenses can risk your financial standing because there is a possibility that some expenditures are getting out of hand because of careless spending.
  • Have a target. Setting a clear target helps you figure out how much money you will be saving in a particular span of time. For instance, your goal is to save P5,000 per month, then you have to stick to it strictly so that you will also limit yourself to spend because you have your own target. Challenging yourself to hit the goal is motivating because you will always find ways on how to be thrifty so that there would always be enough cash for your emergency fund.
  • Have a separate savings account. Do not merge your emergency fund with your regular savings account so that you could still limit your spending. The more you are seeing how much money there is in your bank account, the more you are tempted to spend it on unnecessary things. Having a separate account for your emergency fund also helps you monitor the cashflow and can help you easily trace how much money is entering your account. You need to motivate yourself that no matter what happens, if it is not an emergency, then let your money freeze so that you have money to bring out once you badly need it.
  • Add up to your savings if possible. You do not have to stick to your monthly savings because you may still adjust it if possible. You may level up your savings if there is extra cash. The higher, the better, because instead of spending your excess money on something temporary and unnecessary, might as well keep it for future use. We do not know when will the emergency come so better brace yourself through setting up your own emergency fund which makes you worry less because you do not have to be stressed with financial matters.
  • Make your fund accessible. The best way to keep your funds is in a liquid account so that you will have an easy access to it when an emergency exists. You may keep it in your savings account so you can withdraw it anytime you want to without penalty. However, if you have an easy access to your fund, there is a possibility that you will be tempted to use it for your leisure so make sure that you will discipline yourself not to spend it on unnecessary expenditures.
  • Stick to your plan. This is probably the hardest part in building your emergency fund because it is quite challenging to maintain the habit of savings. However, as much as possible, you should set an attainable and realistic financial goal so that it would be much easier for you to maintain saving regularly. Set up a systematic way of saving so you have a more organized plan of keeping your money for your reserved funds. Always keep in mind that you have started your emergency fund because you have a purpose that will save you from future financial woes.

For How Long Should It Last?

According to financial experts, the ideal emergency fund must last for 3 to 6 months so that you will have more buffer if ever you encounter unexpected circumstances. Compute all your possible expenses within that time period so that you will have an idea how much you need to save. The computation will help you set your financial goals and it gives you estimation on how much you need to keep every month. It will help you budget your money and spend wisely because you know that you have a goal to reach monthly. Perhaps 3 to 6 months buffer is too much for you, but you will definitely get there as long as you are saving some regularly.

Moreover, if someone has a medical condition among the family members, it is a must to build emergency fund for it. Even though the medical expenses can be covered with your monthly income, it is much better to be prepared in case a more serious emergency would come along the way. There is a power in getting prepared for these circumstances if you have something to rely on because you’ve got reserved funds that will help you manage whatever crisis would come. Always consider your future and picture yourself being in that emergency situation before you recklessly spend your money on temporary things.

It still depends on the situation if you are a one-income or two-income family. If you have someone to help you for your expenses, then you may aim for an average financial goal because there will be someone who can still save you from your financial responsibilities. However, if you are the breadwinner, then you should be saving twice as hard in order to fill what you need to be prepared for if ever a crisis comes at unexpected times.

When to Use the Fund?

The answer to this question is very simple – in times of crisis and emergency. As a responsible individual, you should be firm with your goals so do not be vulnerable when there are big sales and promos. Do not be tempted when there are new releases of products from our favorite brands. If you do not need them, then do not purchase them. Yes, it is easier said than done but we should fight the temptation to spend our savings if we do not badly need the item. Remember that we are saving for emergencies and not for our luxuries. You may have separate savings for leisure but your emergency fund must stay from where it is and shall only be utilized during desperate times. Do not be fooled if a sudden expense appears because you might be tricked that it is an emergency when actually it is not. Ask yourself first these three questions and contemplate with your answers:

  • Is it a necessity?
  • Will it seriously affect me if I did not purchase it?
  • How urgent it is?

Giving yourself a chance to consider these questions so that you will have time to realize if your purchase is really important. It will also avoid you to be impulsive when it comes to buying the things that you want. Sometimes, we are just too careless and impulsive that is why we regret it in the end most especially if a sudden emergency expense hits. In the very beginning you should have already conditioned your mind that you are saving money to have a safety net if ever life throws you lemon.

Lastly, you should read books and articles, watch tutorials, or learn from experienced individuals to get tips on how to build your emergency fund. You may also ask insights from your family or friends so that you will be able to learn from their experience. It is also important to hear from those experienced people so that you could avoid the financial mistakes that they went through. Also, you could get techniques and strategies from them on how to budget money so that there will always be remaining cash for your savings despite attending to your regular expenses.

Bottom Line

In building emergency fund, the first thing you need to accomplish is a plan so that your financial goals would be clear. The clearer your goals are, the more you know what to do and how to adjust your spending. Your regular contribution to your fund might not be considered as a big amount but at least it is growing in the long run and you have some stash of cash to spend or to add to your future emergencies. No matter how small your emergency fund is, it is much better to have it than having none at all in times of crisis.

Utilize the fund only in times of emergencies and spend it on the most important matters. Remember that once you spend your savings, it is hard to recover and start again because you will be spending several months again to regain what you’ve lost. It is better to be prepared so that we will not be in shock if ever unfortunate events happened to us at the most unexpected times.

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