An emergency fund can be your very lifeline today in a world that has been struck by an engulfing uncertainty that refuses to go away.
This is probably the first time after WWII that life has become so uncertain for people all over the world. The financial crunch people have gone through during the last two years is probably the worst kind they have seen. Even the 2007–08 financial crisis seems like an infant compared to the COVID-19 predicament.
It’s no news for anyone how many people have gone out of jobs as a result of COVID shutdowns. Small-time businesses have had to shut down. Even corporations have suffered.
Okay, so it’s an extreme example, true. However, it’s exactly times like these that we are reminded of our financial realities and come face to face with the bubble we have been living in. That’s why it’s so important to make savings and allocate some funds for emergency situations.
Financial experts advise that we must have enough in our savings to cover 3–6 months’ worth of expenses. Just so we are not doomed if we suddenly find ourselves unemployed or in a situation where we must survive without a job for several months.
So, what is an Emergency?
It’s important to clearly define what a real emergency is so you know when to dip into your saved funds.
Under no circumstances should you take the money out of this account for unseen and minor expenses like car repairs or house maintenance. Those things should always have separate funds allocated for them. If you keep dipping into your emergency fund for every unseen expense that arises, you’ll never be able to reach your target amount.
Now, of course, an emergency fund wouldn’t be restricted to unemployment. You can always use these funds for medical or other family emergencies. The idea is to have enough savings that you can easily bail yourself out in rainy day situations.
Now that we are clear on that let’s see how to go about building this fund.
How to Start Building Your Emergency Fund?
It does seem daunting to save up enough cash that would last several months. But obviously, it’s a process. Here are a few pro tips to get you started on the right foot.
1. Start Small
If you’re already not in the habit of saving for long-term goals, planning for an emergency fund can quickly put you out of motivation because of the sheer amount involved. That’s why to keep yourself motivated, it’s better to set yourself a small, easily achievable initial goal like a fortnight or a month.
Once you have achieved that goal, you will have developed a habit, and the next milestone won’t seem so unattainable.
2. Calculate your Saving Amount
Once you have set yourself a period, the next thing to determine is how much you need to put aside weekly or monthly to reach your goal amount. Many factors will affect this decision, including your income, current monthly expenses, unseen expenses, family events, and how soon you want to save up.
Here you can use the Flamingo app to help you determine how much amount needs to go into each category every month. You can enter the amount you need to spend on regular and irregular expenses like car repairs, weddings, etc., (known but irregular expenses that should have a separate fund).
Once those are accounted for, the app will calculate how much you need to put aside every week or month to collect your goal amount. It will also help you track your monthly spending and savings and recognize any cash sinkholes that you can consciously avoid.
3. Automate your Savings
Now that you have taken the first few steps, the next thing is to keep this thing going and eliminate any chances of you stepping back. Remember that continuous, steady savings are the only way you can reach your end goal.
So, the best way to ensure a steady amount goes into your fund is to automate your savings. As soon as you receive your income, a predetermined amount should go straight into your savings. That way, it won’t feel like a burden.
4. Re-evaluate your Funds over Time
As your savings increase, you can start to set bigger milestones for yourself. Maybe the next target could be how much money you want in your fund by the end of a year.
Another thing to realize is that your emergency fund may also need adjustments as your circumstances change. For instance, maybe you’re single now, but you’ll need to increase the fund when you get married. Later, when you have children, there will be further adjustments, and so on. And of course, pets count as your dependents too.
Wrapping Up
Having enough saved up for crisis situations will put you at ease, especially in these uncertain times. However, set aside a realistic amount for the recurrent deposits to your fund to keep yourself from getting exhausted or feeling suffocated.
That is the exact antithesis of what we are trying to achieve here. However, by all means, cut back on unnecessary expenses that don’t serve you in any way. That can be an additional drop in your savings jar.
