How To Build An Emergency Fund
An emergency fund is a critical component of personal finance planning, and it provides you with a safety net in case of unexpected expenses, job loss, or other emergencies.
With an emergency fund safely in the bank, you know you’ve got money you can count on no matter what happens to you! Not sure how to get started building an emergency fund? I’ll walk you through the process step-by-step.
Step 1: Decide what your emergency fund goal is. The first thing you must do is determine how much you need to save. In general, you should aim for three to six months’ living expenses. This may seem like an overwhelming number, but don’t get discouraged! Any amount of money you can put away helps protect your financial future.
Step 2: Figure out where you will fund your emergency fund. One way to do this is to create a budget. Look at where you’re spending your money, and then try cutting down on optional expenses, such as subscriptions or dining out. Then take that “extra” cash, and put it in your emergency savings fund.
Step 3: Set up a separate account for your emergency fund. Open a new high-interest account dedicated solely to your emergency fund. Keeping your emergency fund money separate from your everyday chequing account will help you avoid the temptation to dip into it! Set up an automatic monthly transfer from your chequing account to your emergency fund to make saving even easier.
Step 4: Avoid dipping into your emergency fund unless necessary. An emergency is “a serious, unexpected, and often dangerous situation requiring immediate action.” So before you dip into your emergency fund, ask if your current situation meets that definition!
Step 5: Review and adjust your emergency fund goal. As your financial situation changes, regularly reviewing and adjusting your emergency fund goal is essential. Adjust your emergency fund goal accordingly if your expenses increase or your income decreases.
Building an emergency fund takes time and discipline, but the peace of mind and the financial security it provides are worth the effort. Building a solid emergency fund with consistency and patience will help you weather any financial storm.
