A Brief Guide to Building an Emergency Fund
Life is full of uncertainties. You never know what the next second of your life brings to you. That is why it is crucial to be prepared both for the best and the worst. Perhaps nothing can possibly be better preparation than emergency funds. As the name suggests, emergency funds are the preserved money or assets that you can use in uncertain times – which is a case of an emergency.
Prior to the pandemic, financial advisors were of the belief that an emergency fund should be for 6 months. But as we progress through the COVID, it has taught us the lesson that 6 months are not enough. Today, emergency funds for 18 months are considered ideal. Likewise, financial advisors also recommend saving for 18 months. Nonetheless, apart from some exceptions, not everyone needs 18 months of emergency funds. It is ideal for those who are:
Looking to quit their current jobs – maybe they are influenced by the grand resignation.
Massive expenses like marriage, buying a house or purchasing a new car, etc.
Paying off medical bills.
So, whether you need 18 month emergency fund or less depends on your anticipated future steps. Either way, emergency funds are essential. Here is a brief guide to building a decent amount of emergency funds – for 8 months or beyond.
Set Your Goals
One of the fundamental steps that you should take prior to starting setting aside money for emergency funds is setting up your goals. Meaning, you should have an objective in front of you. This could be getting married, buying a new house, purchasing a new car, or coping with any uncertain situation in your life.
Once you set clear objectives, things will open up for you. In turn, you will find purpose in doubling up your savings.
Dedicate A Budget and Stick to It
As you have set up your goals, the next step is to decide on a budget. It will be an amount that you will be paying yourself every month. Depending on your monthly income, you can decide the amount that you will be setting aside.
It is pertinent to mention here that the exact amount you save up does not matter that much as long as you do it every single month. Depending on the monthly expenses and income, you can pay yourself less or more. But doing it every single month is the key.
Do Not Use Emergency Funds Unless it is Really an Emergency
This may sound simple. But it is yet another crucial aspect that you should be mindful of. Unless you do not feel the emergency and you do not find any other way round, do not use your emergency funds. Let them sit there and resolve a grave emergency on time.
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