Emergency fund: how to start one?
Why is an emergency fund so crucial to your financial health?
- It will decrease your debt. In times of emergency, people with no emergency fund usually turn to the faithful credit card: this means your debt repayment will most likely be the first thing to suffer, digging you even deeper into debt.
- It will smooth out your budget.Without an emergency fund, you will have to re-adjust your budget at the first sign of an emergency expense. With an emergency fund in place, budgeting will be much simpler and less stressful.
- You can prevent late fees. If you are living from month to month, it is inevitable that there will be times when you cannot pay a bill on time, or the only option is to overdraw your bank account. An emergency fund can help prevent these financial lows.
- You can finally get ahead. It is very stressful to play catch-up every month. If you have an emergency fund your financial stress will decrease, because you can pay bills in advance.
Most people know that an emergency fund is essential and have good intentions, but lack the knowledge to build up one. These are some solid strategies for putting deed to word.
Selected strategies for building up an emergency fund
(Read the full article at https://bit.ly/1pmrpdB).
- Start small. Every little bit helps – just start.
- Automatic deduction. Setting up an online savings account works: this way, your contribution is automatically deducted each month.
- Treat your fund contribution as a bill. If you add your emergency fund contribution to your list of bills, it becomes a non-negotiable and you won’t spend it on unnecessary luxuries.
- Reduce your spending. Have a look at your budget and see where you can save money, then use that money towards your emergency fund.
- If you pay off debts, don’t spend that money. As soon as you finish a payment, e.g. a car payment, be careful of spending the money you used to contribute. Rather, take the amount you were paying to that debt and use it for your emergency fund.
- Quit smoking or drinking. No need to elaborate: you will save significantly if you kick the habit.
- Limit your access. At one time or another, you will be tempted to spend your savings. If you know your self-discipline won’t always be what it should be, a good solution is to put your savings an account that is hard to access, e.g. having it roll into a CD or Treasury bond.
- Save tax refunds or bonuses.
- Save your change. You will be surprised to see how those coins add up.
- Skip dessert. Save the money you would have spent in an envelope and see how it adds up. This one has the added benefit of losing weight!
- Stay in. Cook and entertain yourself at home and put the savings into your emergency fund.
- Freelance. Use the extra income towards your emergency fund.