An emergency fund is something that every household needs to maintain. Some households are smart enough to maintain an active emergency fund and feed it a fixed amount every month.
Other households are run by imprudent people who spend extravagantly and learn the importance of saving in the hard way. It’s up to you to decide what type of household yours is gonna be. If you think it makes more sense to spend frugally and maintain an emergency fund, this article can help you build and manage one.
Building an emergency fund – here are some handpicked tips to build an emergency fund.
Audit your earnings
Start by doing an audit of your income and expenditure. How much do you earn every month? How much of it you save? Do an audit today and find out how much money you are earning every month and how much of it you are spending on groceries, electricity, clothes, traveling, entertainment, education, transport, etc.
Some expenses are unavoidable. Grocery bills, electricity cost, household maintenance cost and credit card dues fall into this list. Not all expenses, however, are necessary. I suggest that you segregate expenses into multiple categories. One category, mentioned already, is necessary expenses. Other categories can be moderately necessary, not-so-moderately necessary, not necessary at all, etc.
Start saving money
After you are done with categorizing your expenses, the next step is to begin saving money. It’s important to understand that creating an emergency fund is not mere saving. It’s different. Normally people save money for a purpose. It can be buying a motorcycle or a PlayStation or an overseas trip – in most households, saving has a purpose. An emergency fund, however, is not redeemable unless a crisis situation arises. It could be a financial emergency or health hazard; the situation should be serious enough to break the emergency fund.
People often use the money in emergency funds for purposes that are not emergency-like at all. It’s tempting sometimes, other times you might feel there’s no other option when in reality there are plenty of options.
I advise you to first decide what you’d call an emergency. Once it is decided, make a pledge that the money you’d have in the fun would be spent only to overcome the emergency situation should you find yourself into it.
Managing an emergency fund
Building an emergency fund is not that difficult if you know how to track your expenses and control your habit of spending. Nevertheless, managing it requires a bit of work. Here I lay down some solid tips for you to maintain the fund.
Consider earning extra
You can manage the fund by pouring money into it that comes from additional sources. In my opinion, it’s a great way to manage it as it will keep you active and fill your pocket. Also, you won’t have to funnel normal monthly income into the fund and as a result, the synchronicity between the emergency fund and the extra source of earning would remain constant.
Keep it updated
A mistake many people make is that they don’t update the emergency fund. What does it mean to keep the fund updated? After every three or six months, you need to compare your savings with the current market price. If the money you are saving is not enough for the current prices in the market, consider saving more. If you save a meager amount every month while the rate of inflation surges ahead, the fund won’t help you much in the long run. Hence, consider adjusting it every now and then in accordance with the market price.
Calculate the risks
In order to keep your emergency fund properly updated, you need to calculate all the risks. What exactly I meant by risks? What if a financial catastrophe arrives and you find that the little savings you have in your emergency fund are too little to survive it? You’d be in a miserable condition. Anticipating the possible risks can help you decide whether to slash your budget and put more money into the emergency fund or not.
Some of the risks are joblessness, restricted access to cash, pending debt, etc. Calculating these risks and revamping your financial lives accordingly can help you battle these situations out should they occur. The only way to plan for these scenarios is to gauge the risks of them arising in the near future.
Face the reality
I’d like to elongate the last point because people need to be warned about the current economic affairs. The United States is currency having a debt of $23 trillion and it is increasing as I write this. A nationwide economic meltdown is not far-fetched anymore. An emergency fund, therefore, is absolutely necessary and so is accurately calculating – taking help of big data, if need be – your risk of falling into it. Only such preemptive measures can help you dodge it.