(DailyAnswer.org) – In these unpredictable times, your financial situation can change for the worse in the blink of an eye. One moment you could be having your dream job, and the following day you’ve lost it. You could also encounter unexpected crises, like COVID-19, when you least expect it.
If such scenarios were to occur in your life today, how long would you survive the period of hardship? Putting money aside in an emergency fund can not only help you survive but thrive during challenging times in your life. This post shares five essential tips for building an effective and lasting emergency fund.
Have an Emergency Fund Budget
Having a specific savings goal for your emergency fund is necessary to stay motivated and on track toward saving. You can only set a monetary saving goal when you know how much you can put aside from your monthly budget.
Check your current budget to determine if you can afford to save funds to your emergency fund from your income. If it’s impossible, look for areas to cut expenses and channel the money to your emergency fund. Once you land on a favorable amount, include it as part of your monthly expenses in your budget.
Keep Your Funds in an Easily Accessible Account
Since an emergency can occur at any time, your funds should be somewhere accessible but not in an instant. The proper turnaround time for receiving emergency funds should be at least a day because it’s convenient and discourages frequent withdrawals.
The best accounts to set up an emergency based on that criteria are:
- Savings accounts: Traditional savings accounts are the most convenient for emergency funds as they’re simple to open (through your checking account), use, and keep track of. They also have minimal requirements and turnaround times for accessing money.
- High-yield accounts: High-yield savings accounts have higher interest rates than traditional savings accounts. Although your emergency funds grow faster here, you can only access them after a specified period and may face penalties for early withdrawals.
- Roth IRAs: Saving in a Roth IRA allows you to withdraw your funds without penalty, even if you haven’t reached the threshold for withdrawals. Roth accounts also have higher interest rates than high-yield accounts
Save Enough to Cover Six Months
The recommended funds to have in an emergency fund are six months’ worth of income or six months’ worth of basic expenses. However, the exact amount can vary depending on whether you have dependents, a spouse (and if they have an income), and your background (e.g., wealthy parents). Ultimately, the more responsibilities you have, the more funds should be in your emergency account.
Start Small and Automate Contributions
Don’t set the savings bar too high when starting. Instead, start with the contributions you can afford without straining your budget and normal savings. You can cut even if it’s just one item, such as buying coffee, and save $50, $100, or $200 monthly.
Just ensure you’re consistent with your saving habit to make a significant difference in the long run. If possible, have your bank or employer automatically send money from your income to your emergency fund. This way, you won’t have to worry about missing payments.
Withdraw Only in Actual Emergencies
Before withdrawing any amount from your emergency fund, ensure that what you’re looking to fund using the money qualifies as an actual emergency. Real emergencies include:
- Job loss
- Extensive home and car repairs
- Large medical bills
Also, if you withdraw funds, always ensure you replenish the emergency fund account.
An emergency fund is a requirement in today’s world. It can help you, your family, and other dependents around you during an unexpected crisis. The best accounts for emergency funds are accessible but not in an instant. This way, you won’t be easily tempted to withdraw money from your emergency fund anyhow.
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