A guide to build your emergency fund
We’ve all experienced unexpected financial emergencies such as medical bills, a reduction on our income a car accident or even a damaged cellphone and it often feels like these events arise at the worst time.
Building up an emergency fund an excellent way to protect yourself to not mess up with your budget when an unexpected financial emergency arrives. By putting money aside, you will be able to re get back on track financially or a have a quicker recovery.
In this article we will review some helpful topics not only to create a emergency fund but to handle it correctly.
- What is an emergency fund?
An emergency fund is a reserve of cash with the only purpose of facing unplanned financial emergencies or expenses. Some scenarios can include home or car repairs, medical bills, or a reduction of income. - How much do I need in it?
Usually is it recommended to at least save the 10% of your total income, but as we have mentioned before every situation is unique. To set a percentage to start building your emergency fund we highly recommend you to review the most common unexpected expenses you’ve had in the past and calculate an average of how much they cost. - How do I start?
There are different strategies to start an emergency fund and they will depend on your ability to save or if you have a variable income.
Create a savings habit
Building a savings fund is easier when you have the capacity to put money away. But if you do not have the habit of doing it there are some keys to promote and create this habit: - Set a goal:
Define a specific goal for your savings. Having an achievable goal will help you stay on track. Calculate how long it’ll take you to reach your goal and stick to that goal. - Create a system to make contributions consistently
One of the most effective way to make a regular contribution is setting up automatic recurring transfers, or you can put and specific amount of cash aside every payday period. Try to reach the amount to set in your initial goal. - Check your progress:
Checking you progress can motivate you and empower you to keep going. You can activate account balance notifications or write down a total of your contributions. - Take advantage of extra opportunities to save:
If your have the chance to add an extra contribution to your fund, do it! Just keep in mind this extra contribution should not be taken from other expenses of your budget. - When to use it or how to prevent a wrong use?
Set some references for the proper use of it, making a list of what would constitute an emergency or unplanned expense. Try to stay consistent and follow only emergency expenses listed. This will avoid the misuse of it.
