Setting up an emergency fund gives you a safety net for when life takes a turn for the worse. It can serve as your lifeline if you ever lose your job, get into an accident, fall ill, experience a catastrophe, or any other incident that leads to unexpected expenses.

Using such funds also reduces the need to take out loans — that would otherwise add to your existing debt — and ease your anxiety about money during tough times. Simply put, having an emergency fund helps you become financially prepared to deal with surprise expenses.

Read on to know how you can start building the emergency fund that will keep you afloat during difficult times.

Determine Your Monthly Budget

The first step to saving money is knowing how much of it you spend and keep. Budgeting helps you determine how much you should deposit into your emergency fund without compromising your expenses for other living needs.

Crunching the numbers and calculating your monthly financial consumption also allows you to manage your income better, reduce unnecessary spending, and redirect those extra funds into your savings.

You can opt to track your expenses by writing them down for a month in a diary. Using a budgeting app also makes it easy to get an overview of your monthly financial situation.

Establish Your Goal

The purpose of an emergency fund is to cover your essential expenses, which you can determine by looking at your budget plan. The standard goal for an emergency fund amount is at least three to six months’ worth of living expenses.

Following this standard will undoubtedly present you with a significant amount for your emergency fund goal. However, living in a volatile economy can make it difficult to even consider setting such a high approximate target.

If the goal you calculated feels too overwhelming, know that you can always start with what you believe is attainable. What matters is that you’re motivated to start spending no matter how big or small your goal is. You can eventually work your way up and increase your goal and savings little by little.

Consider Opening a High-Yield Savings Account

You might already have a personal savings account where you can deposit your emergency fund, but using only one account could mix up the money for your daily needs and emergency needs. It also presents the risk of using your savings on incidental expenses.

With that said, it’s better to open a separate account specifically for your emergency funds. A high-yield savings account (HYSA) is the ideal choice for this purpose since this type of account pays more compared to its standard or traditional counterparts.

While it requires a higher minimum balance, HYSA offers competitive interest rates and is risk-free which allows your savings to grow over time.

Automatize Your Deposits

After determining your budget, realizing your goals, and opening a separate bank account, you can now start saving. You can make this process more convenient by setting up automatic deposits from your payroll or savings account directly to your emergency funds.

Automating your deposits makes saving for your emergency funds easier and allows you to easily keep track of where your money goes. It will also reduce the likelihood of you using those funds on something else other than emergencies.

Some banks have mobile applications wherein you can set an automatic transfer to your emergency funds account. The frequency depends on how often you want to make these transfers. You can also do this by visiting your bank and following the instructions for setting up an automated deposit with them.

Slowly Increase Your Savings

You’ll want to make deposits of the same amount as the monthly goal you established. Strive to increase your contribution by a specific sum until you’ve reached your savings goal.

However, there are instances when it would be difficult to match the deposit amount with your monthly goals. When this happens, consider setting aside whatever you can afford for now and slowly raise the amount over time until it equals your monthly savings target.

You’ve Reached Your Goal. Now what?

After months or years of depositing into your emergency fund account, you’ve finally reached your main goal. What happens next? Well, you could spend your future income on other things like investing or using it for recreational activities.

There’s nothing with those ideas. Investing is a great way to work your money, increase your wealth, meet other financial goals, and prepare for retirement. On the other hand, using your income on fun activities can help you relieve the stress of handling your finances and caring for your mental well-being.

But if you feel that those things are not it for you, should opt to continue depositing any extra cash into your emergency fund instead. Doing so gives you additional leverage and will help you stay afloat if the crisis you’ll use it for lasts longer than your expected duration.

Emergencies happen whether you prepare for them or not, and they can sometimes last longer than expected. Planning with an emergency fund ensures that you are ready to face any crisis without clearing out your savings or adding to your debt.

Remember that if you ever need to draw from your emergency fund for other expenses, make sure that you spend it carefully and replace the amount you used to keep you on track with your goals.

lendforall team

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