Managing Emergency Funds

What is emergency fund? Why is it needed? When will we use it?

Emergency funds are used to set aside funds required in case of a financial problem, for example, being laid off, a prolonged sickness or a large expense. The purpose of emergency funds is to enhance financial security by making a fund safety net that can be utilized to meet emergency costs and lessen the need to take high-interest debt options such as credit cards or unsecured credits.

A readily accessible emergency fund at all times is perpetually a smart idea. It can secure your financial condition when you just got laid off or during a natural disaster that may affect your living courses. The recommended amount of emergency funds is three to six months of your monthly expenses so that you can depend on these funds to support you during a crisis.

Here are some tips that might help you to manage an emergency fund:

Make a balance sheet 

Calculate how much money you get and how much you spend by making a balance sheet. This is to measure the cash you get after deducted by tax expenses. Then, determine how much emergency fund you want. It is normally recommended to put something aside for around 3-6 months of your monthly expenses for emergency funds. This is critical since your choice will characterize your financial plan.

Create a financial plan

When you know the amount of emergency fund you need to spare, you need a plan to spare it. If you have monthly costs of about $500/month and you need to put something aside for 3 months, that would imply that you have to spare $1500 (500x3). Nonetheless, you will need to consider your expenses to decide how long it will take you to save that money. If you find that there is no cash at the end of the month to put into the saving, you will have to pay yourself first.

Make an adjustment in your account

If you don’t have any savings account, make one. Then, start saving a small amount of money. It might take time to accumulate enough money for 3-6 months of expenses. You may put your funds into savings products that have highest-possible interest rate that doesn’t impose penalty in case of early withdrawal. Keep in mind that the motivation behind having emergency funds is the ability to use your readily available funds any time.

Set up automatic payments into your account

You should have specific amount that will be going into savings. By doing so, you will make you harder to spend your fund the cash and you'll feel hesitant to spend it when you know it's reserved for your emergency fund.

Increase the amount going into emergency fund

As you reduce your ways of spending money, you should seriously mull over expanding the sum you are depositing to your savings account. If you previously save $15 per week, you might probably want to increase the amount to $25 or more per week.