If you’ve ever found yourself in a sticky financial situation in which you were forced to dip into your credit because of unexpected expenses, then you should consider building an emergency fund.
What is an emergency fund and why is it important?
An emergency fund is an amount of money you set aside in case you find yourself having to pay unexpected expenses. In short, it’s “savings for a rainy day”. We would all love to think that your budget will put you in good financial standing, but unfortunately, that’s not always the case.
Unexpected expenses are not to be confused with periodical expenses like yearly subscription renewals, tuition, and holiday spending. These should already be included in your budget. Unexpected expenses are really those that, as the name suggests, you don’t see coming.
Everyone has to deal with unexpected expenses — whether that be from a car breakdown, a job loss, or an emergency visit to the dentist — and that’s exactly why you need an emergency fund in your budget.
How to set up an emergency fund
If you’re new to budgeting, here are 5 tips to ensure your success in building an emergency fund:
1) Start by looking for ways to increase your income and reduce expenses
If you’ve set up a budget and every penny of your income is already accounted for, then try looking for ways to boost your income or reduce your expenses. This could be as easy as going over your yearly subscriptions and canceling the ones you’re no longer really using on a regular basis.
It could also involve obtaining another part-time job or doing some freelance work for some extra cash. That way, all you need to do is to take that extra money and set it aside for your emergency fund.
2) Open up another savings account
You’ll want your emergency fund to be separate from your regular savings account so that you know exactly how much is for spending on a rainy day, and how much is for reaching your financial goals. The more you use your savings account when you have to spend money on unexpected expenses, the more tempted you’ll be to use it on a regular basis. So save yourself the trouble and keep them separate.
When opening another savings account, do your research first. See how many fees you would be charged if you were to ever spend the money in that account, as well as how much interest you could accumulate.
3) Automate your savings
One way to ensure that you won’t forget to add any money to your savings is to automate them. Most financial institutions will allow you to set up an automatic transfer to your savings account the minute you make deposits into your regular checking account. They will take a portion of the amount deposited, and split it into various accounts.
This is a great way of ensuring your money is actually going where you need it to — and it’ll remove any temptation you might have to spend it. Out of sight, out of mind!
4) Make sure you only use an emergency fund for emergencies
We get it — watching your money grow in your account for no foreseeable reason might make you tempted to spend it on a vacation or that big computer monitor you’ve been eyeing for months on end. Don’t give in.
Although you might not know what exactly you’ll be using that fund for, future you will thank you if you succeed in not touching it.
5) Review and reorganize your budget on a regular basis
Financial goals can change depending on circumstance. Whether your work situation changes, or you expecting a child, or are looking to purchase a house, your budget and financial goals will be affected. So regularly go over your goals, and if there’s any change, then let your budget reflect it.
The more you plan ahead, the more likely you are to be financially stable and healthy, and the more equipped you’ll be to handle unexpected expenses.
If you’re having trouble setting money aside anything other than your debts, contact a licensed insolvency trustee. Your LIT will analyze your personal financial situation and will come up with the best solution to help you get rid of that heavy burden. Not only will they ensure you’ll be equipped to handle financial emergencies, but they will also make it their mission to help you become entirely debt-free.