It has become very important and advisable to build an emergency fund in the United States to enhance the financial status and avoid stress. This is a fund that you can use in case of an emergency, to cater for anything you did not expect like a hospital bill, a car breakdown, or loss of a job.
The presence of this fund will help you avoid borrowing funds or using high-interest loans when in need. Establishing an emergency fund may seem like a herculean task but, it is definitely possible, especially when divided into several achievable goals. Below are the step by step guidelines on how you can build this all-important financial buffer:
Setting a realistic goal
The first important step is thus to establish the amount of money you should contribute to your emergency fund. Financial planners generally advise that one should have an emergency fund that can cover three to six months’ worth of expenses. However, this can be a problem depending on certain conditions such as employment status, income, and the size of the family among others.
To find your target amount, you need to first identify all your basic expenses that you will need to meet in a month such as house rent, electricity, water, food, transport, and insurance. Add this total to the number of months that you want to obtain the total for. This will ensure that you have a clear objective and this will in turn encourage you to work hard towards achieving your objective.
Evaluating your expenses
To be in a position to save, one has to first determine how exactly they are spending their money. First of all, it is recommended to record all the expenses for a month. This ranges from payments such as bills and food stuffs, to food eaten outside and other forms of entertainment. By dividing your expenses into categories, it is possible to determine in which sphere it is possible to save more.
This is why it becomes crucial to understand how much of the monthly income can be set aside towards the creation of the emergency fund. When you are done with this step, it becomes easy to maneuver and arrange your affairs in a way that will best help you save more.
Savings plan for a month
Thus, once you have determined the target amount and assessed your current expenses, the following step is to define a feasible monthly savings rate. It could be a specific sum that one commits to contributing or it could be a proportion of the salary. The important thing is that it must be set at a level that you can comfortably meet without putting a dent in your pocket each time.
You can take it a notch higher and make your savings automatic so that you do not have to think about it. This way, you would be putting through transfers from the checking account to the savings account and this way, you get to save money frequently until you reach your goal.
Choosing the right account
It is crucial to choose the right account for your emergency fund so that your money is easily accessible and at the same time can earn some interest. A high-yield savings account is ideal here since it comes with a higher interest rate than the normal savings account.
Also, money market accounts should also be considered as they sometimes offer even higher interest rates and have the option of check writing with some limitations. See that the account which you select has low transaction charges and is easily accessible in times of dire need, but is not easy to access in a way that would make you want to use it when you do not need to.
Automating your savings
To be able to create an emergency fund, consistency is very important and automation can help a lot in this aspect. This means that you should set up a schedule wherein a certain amount will be transferred from your primary checking account to your emergency fund account, either every two weeks or every month.
This helps in avoiding the urge of not paying a deposit and helps in accumulating more money in the savings account. Many banks provide this service free of charge and it is easy to configure either through the bank’s website or its mobile application.
Regularly reviewing your fund
It is recommended to check on the emergency fund from time to time once it has been set up. Reminiscences of life may happen which may alter your expenditure and the amount you require in your reserve. Perform a review in every six months or in cases of some life event like a new job, marriage, or birth of a child.
Here, ensure that the amount you have saved remains adequate to cater for your needs as per the agreed time frame. If the amount you are saving every month is not enough to maintain your emergency fund, adjust your target savings for the month.
