Emergency funds are separate savings set aside to offset any unplanned expenses. They can also be referred to as money set aside for times of financial distress.
Emergency funds come in handy when you are in a situation where you need immediate financial assistance. It makes you less prone to drowning in unplanned debts since you don’t have to borrow funds to finance the emergency.
Emergency funds also help improve your financial security because of the safety net set aside to be used in place of emergencies like illness. Preparing for emergencies enables you to manage your finances without interfering with your regular budget.
Having a designated fund for emergencies prevents you from taking out high-interest loans to cover unplanned expenses. There’s always the question of what portion of your income should be directed to your emergency fund. Some factors always determine this.
However, financial couches and experts recommend that an emergency fund account be able to cover three to six months of living expenses, particularly in the case of losing a job.
The living expenses only include the must-haves such as housing, groceries, insurance, and other basics but not luxuries like entertainment. An emergency fund covers many unexpected expenses and should be filled up once you spend some funds from the account.
HAVE YOU EVER THOUGHT OF HAVING AN EMERGENCY FUND BUT DON’T KNOW WHERE TO KEEP IT? WELL, THIS MIGHT BE HELPFUL.
It is essential to have your emergency funds separate from your other bank accounts, like your savings account, because we want the funds to be very accessible in times of emergencies but, again, not too accessible for you to dip into them unnecessarily.
An emergency fund can be kept in a money market account with a debit card and check writing options making it convenient. You can also save in a High-yield savings account which is reasonably accessible.
However, it sometimes creates a delay in receiving funds during an emergency. This is because you’ll need to use another bank to transfer money in and out of your High-yield savings account.
Setting up an emergency fund is quite simple. You choose where you want your funds to be in a money market account or any other convenient way.
Secondly, you set your savings goals and plan how you want to achieve them. And above all, you should be consistent with your savings. Be determined to make your account stable and when you use funds from it during an emergency, be quick to refund the account to make it stable, and it will be of use during the next crisis.
Setting up an emergency funds account is easy, but building the account is a task. This is, however, not as heavy as it seems because it is possible to build the account to where you want it to be.
Here is how to build your emergency fund account
- Having multiple streams of income. You can set up small businesses or side hustles as extra income streams. This, together with your salary in the case of employment, boosts your emergency fund account.
- Be responsible and track your expenses. Get to a position where you can account for your expenses to avoid overspending.
- Have good financial habits and adopt a saving culture.
- Also, learn to eliminate unnecessary debts and live within your means. Borrow only when necessary and know when to return to avoid accumulating debts.
An emergency fund is essential and makes sense when you need financial aid immediately. It saves you from debts and inconveniences because, in terms of borrowing, you don’t expect at all times to get the money there and then.
