What Is An Emergency Fund? How Do You Set It Up?

Apart from the usual savings, one of the best investments a person can work on is an emergency fund.

No one knows what the future holds. Good things will happen, but the bad ones are also inevitable. Unexpected incidents may happen any time and it would be such a great relief to know that you can easily withdraw some money whenever such incident occurs.

Emergency fund is a backup plan you can use when fortuitous events occur (e. g. loss of money, health expenses, calamities, etc.). It is specifically projected to save you from such incidents whenever you are in need of immediate resources, or when the days are too hard that you and your family gets short on budget.

Why would you ever need an emergency fund?

First, is in the word itself: for emergencies. You will never know when or where an incident will occur so being prepared is better than cramming on the last minute.

Second, it will help you get through whenever your daily budget suddenly becomes short or when someone you know is in need of cash.

For further understanding of its purpose, emergency funds can be divided into two categories: short term and long term.

Short-term emergency fund answers your need cash at hand. Say, when you need to purchase something but you left or lost your wallet, whenever something unexpected came or when a minimal emergency occurred such as delayed salary, car repairs, immediate need to pay for bills or fees and many more.

It is also a specific amount of money that can guarantee you that you won’t go broke even just for a day.

Moreover, short-term emergency fund should be enough for you and your family to survive in a short period of time, until you get a hold of your actual earnings for the month.

Meanwhile, a long-term emergency fund makes it possible for you to survive large-scale emergencies such as health issues, sudden job loss or occurrence of natural calamities.

Having an emergency fund gives you confidence that whatever happens, you have a special fund you can hold to without having the need to apply for a loan or borrow from friends and relatives. The value of an emergency fund isn’t much important as it can still reduce your expenses for the time being.

To be able to properly establish an emergency fund, here are some tips you might want to take note of:

Set a specific goal of amount.

Make a decision on how much emergency fund are you intending to save for and how long it can cover your daily or monthly expenses. Also, try to compute the time it would take you to achieve your targeted goal and the amount you should be adding every now and then.

Through this method, it will be easier for you to determine if you are getting close enough to achieving your goal.

Spend your money wisely.

There will be times that you will be tempted to purchase things you seemed to like at first, especially when you have received your salary already. Some people like to call this as a reward.

Sure, if you’ve been dreaming of buying something you have been saving for or an item you’ve been checking out for a long time, you can do so. But if you only purchase it without even hesitating, then you should think twice. Instead of purchasing items or foods that you didn’t really needed, you can add it to your savings to put in your emergency fund.

In that way, you can still put your money into good use.

Discipline yourself as much as possible.

There will be times when you will forget or feel lazy increasing your funds, so it is much better to opt for automatic bill payment plans for your checking account.

By applying this method, you won’t have to constantly remind yourself to add a portion of your salary to your fund since it will be automatically done every time you receive your earnings. Also, you won’t be tempted to purchase things you don’t really need because your daily budget will have a limit.

Never disregard even the smallest amount of money.

As the saying goes, a dollar won’t be complete without a penny. You see, any spare change you can get each day will surely be of help to you than you expected.

Example, you ate at a restaurant with your family and you got a change amounting to a dollar or more, put it in a jar and transfer the cash you will save monthly to your emergency fund. Say, you had a daily spare change amounting to five dollars. At the end of the month, you can save a total of P 7,500!

It may seem hard if you’ll think about it, but if you simply turn it into a habit, it will work out just fine.

Opt for something simpler.

Often times, we tend to spend too much without knowing that how much we can save if we go for something simpler.

Instead of eating at a restaurant, why not cook your family’s favorite food and dine at home? Or, instead of watching movies at a local cinema, you can buy DVDs to watch at home. That way, you can save a bit more and you can even be comfortable while doing so. Plus, you won’t get stuck in traffic after you go home!

Emergency fund isn’t too hard to build. With determination and consistency, you’ll get to your goal in no time!