Having an emergency fund is a fundamental aspect of personal finance. This fund acts as a financial fallback for unexpected expenditures or sudden loss of income. Although an emergency fund might not solve all financial dilemmas, it surely alleviates financial stress to a considerable extent. Here’s a four-step guide to setting up your emergency fund:
1. Assess Your Financial Condition
Your first task is to scrutinize your spending habits and determine how much you need to squirrel away each month. Take a good look at where your money goes and identify potential areas of waste. Accordingly, devise a strategy to adjust your expenses, enabling you to contribute towards your emergency fund.
2. Set Up a High Yield Savings Account
Initiate a high-yield savings account online as your next move. Many banks allow you to link this account with a current account, which facilitates instant transfer of funds. You can then easily withdraw these funds using a debit card when necessary.
Unlike certain investments like stocks and ISAs which restrict instant access to your funds, a high yield savings account offers immediate availability of your savings. Opt for banks that don’t impose fees or demand a minimum account balance. Usually, you can open an account with an initial deposit of $25 or similar.
3. Start Small
Don’t rush to save a hefty amount every month as many people find this unrealistic. Instead, gradually develop the discipline of saving money by putting even a small amount, say $25 or $50, into your emergency fund each month. The key is to foster a good financial management habit.
4. Gradually Increase the Amount
Once you’ve accustomed yourself to saving, aim to progressively increase the amount you save. This might call for revisiting and readjusting your spending habits and even making a few cutbacks. Consider automatic savings options where a designated amount is debited either from your paycheck or transferred to your high-yield savings account.
Saving more propels you faster toward your emergency fund goal of covering six to nine months of expenses. Once you’ve achieved this, you can consider directing the amount you were putting towards your emergency fund to additional retirement savings or another financial goal.
