Whether you’ve lost your job or been able to make the switch to remote work, you’re likely thinking of your finances more than ever these days. Even amid a time of financial uncertainty, there are easy ways you can begin to rebuild your own emergency fund to use in the future.
What's an Emergency Fund again?
The process of saving money for an emergency fund is rather simple: You transfer money into a savings account (Equivalent to 3-6 months worth of expenses) and then leave it alone. A simple concept but for most of us, it's already a struggle.
A more detailed description is that an emergency fund is a readily available (liquid) source of assets to help you navigate financial disasters/dilemmas, such as loss of a job, debilitating illness, a major home or car repair or during this year, a global pandemic.
The benefit of building an emergency fund goes beyond having money in an account to cover an emergency or unexpected expense; accumulated savings also represents financial security and stability that most of us seek.
The details of Emergency Fund
Most financial gurus, or even planners themselves simply say 'save 3-6 months of expenses' and that's it. But there is more to it. Have you ever wondered why the range 3 to 6 months?
Three months if you’re single with a steady job or you’re in a relationship and both of you are employed. Six months if you’re single and your job is less steady or if you’re in a relationship and only one partner is earning an income.
Additionally, it should be said that emergency funds are not there to just save you during emergencies but it also saves you from getting into debt or tapping into your investments.
The New Emergency Fund
The good news is that there are simple changes you can make today, which will have a big impact on your ability to save.
Save 6-12 months of income instead - In this global health crisis, with all the new things we have experienced and learned, I realize the 3-6 months is no longer enough especially during this pandemic. Saving your whole income allows you to gain some extra cash outside of expenses since we usually budget based around our income to pay bills, buy food and the like.
Awareness of spending habits - Spending money can become habitual and you don’t even think about what you are buying.
Make a Budget - it is the most basic financial plan and it is the surest way to discover where money is currently going in/out. Once you know where your money is going, you can adjust and prioritize accordingly based on situations, a shift to an active rather than reactive position.
Tweak how you spend - Another way to find money is to buy differently. Put your strategic hat on and find cheaper ways to get the things you want.
Identify & re-allocate windfalls - Any unexpected reward or financial gains (bonus, winnings) can be thrown into your emergency fund.
Lastly, Whatever you do, try not to rely on your credit card, unsecured loans for emergency purchases or worse tap into your investments. Aside from saving you during emergencies or crisis situations, an emergency fund protects your portfolio against that risk.
If you do not have an emergency fund, then you are in a state of emergency. Imagine how stressful that is. Now that you know about this, go and do something about it!