Life is uncertain and does not follow our plan. The unforeseen situations of life coming your way will cost money. Therefore, it is wise to anticipate the unpredicted expenses and reserve savings as the Emergency Fund.

What is an emergency fund?

Emergency Fund is the money saved aside for the unexpected emergencies of our life from our monthly income in a planned manner.

Life does take a twisty curve on a bumpy road, so prepare yourself for the damages and its expenditures.

Every person’s life is different; hence the emergencies in it will also differ from others.

Here is a compiled list of common emergencies in a person’s life.

1. Major medical expenses.
2. Sudden cut down in the paycheck. 
3. Loss of job.
4. Crucial house repair.
5. Emergency car repair.
6. Natural disaster.
7. Global pandemic.
8. Recession.
9. Bad financial decisions.
10. Fraudulent business transactions.

There may also be a person facing a financial emergency due to a completely different reason than above. 

The key idea is to guide you to prepare for a financial emergency and help you be free of tension.

How much emergency fund should you have?

It is better to reserve three to six months of essential monthly living expenditure as a general rule. 

Your reserve will differ from the other as the basic monthly expenses will vary for each household like grocery, medicines, utility bills, debts, gas, insurance, school fee, rent, etc.

With the global pandemic, it is better to have an emergency fund covering up to one year. 

Life has become unpredictable after the recent pandemic, so being prepared with emergency funds will ease your stress during unprecedented times.

Financial confidence will help you focus on the emergency rather than thinking about financial spendings related to the problem.

Emergency funds to survive for three months are perfect for families with steady and fixed paycheck income. 

If you are unmarried or a person with multiple income sources, you can have a rainy day fund of three months duration. 

Families with a single person earning, less steady income job, variable income, earnings from a solitary source of income, and families with kids must have an emergency fund saved up to six months.

Setting aside the funds for more months will provide a better buffer during a crisis.

Why Should Creating An Emergency Fund Be A Top Priority?

Being prepared for the rainy days will make you self-confident and hopeful about the problem you face and concentrate on the issue.

1.Reduces Stress.

There is a certain level of reduction in the stress associated with the situation as you don’t have to think of arranging the finance.

Financial liberty gives you a tremendous amount of leverage to make a confident decision in solving the problem. 

Without you wondering about the cost, how will you arrange money, or whom to ask for money in this emergency will decrease the tension and strain on you.

2.Financial Security.

Saving for the emergency fund will improve financial safety. It will make you more stable and secure with finances. 

Even with emergencies, you can continue to have financial security when an emergency fund exists. It protects your financial stability.

3.Avoids Breaking Your Retirement Funds.

Retirement funds are for your retirement; that is, when you are aged and planning to have a livable future. 

Depending on the retirement funds for a crisis is a wrong financial decision. It may appear to be right as it is your money end of the day, but you have been saving this for a long-term purpose.

Early cashing out retirement funds will have penalties and taxes levied on the amount. The internal revenue service (IRS) will deduct 20% for the taxes from your funds.

IRS will apply a 10% penalty when you file your tax return if you are less than 59 ½ of age and withdraw money from 401(k).

4.Max Out The Credit Line.

Utilizing the maximum credit on your credit card for emergencies is not wise as you will postpone the expenditure to the coming months. Therefore, it is not a permanent solution.

The repayment will be in a bulk payment affecting your financial stability or adding up to your monthly liability with a higher-interest rate.

Max out credit line will affect your credit score, and your loan approval process will be tedious during mortgage, car loan, or a new credit card.

5.Liquidating The Investments.

Using the investment for an emergency is imprudent. It can make you lose the money you have invested for unlocking it before the set period.

6.Depending On Family and Friends.

Asking your family and friends to lend them money for emergencies can put you in a very uncomfortable position. 

Planning to have sufficient emergency funds will prevent you from the damages which are caused by your helplessness of finance to solve the problem.

How To Save Emergency Fund?

With little planning and a wise approach, you can build your emergency fund by following the steps below.

1.Calculate your monthly income from all the sources.

2.Make a list of all the expenses during a month.

3.Add all the essential expenses which you need to lead your life. It is the amount you need to set aside as an emergency fund as per your requirements.

4.Decide on an easy monthly deposit that has to be set aside for the emergency fund.

5.Save this emergency fund money in a separate bank account to make this money to be out of your sight.

6.Deposit the money in a high-interest saving account.

Where To Save Emergency Fund?

The prime goal of the emergency fund is the financial safety of you and your family. Do not overthink in terms of earning returns from that savings.

Tips on how to select the options to save the emergency funds for you.

1. Easy to access during an emergency.
2. Delay in the process to release the money when needed. 
3. No penalty for withdrawing the saved funds during a crisis.
4. High interest earning.
5. No brokerage charges to process the withdrawal of funds.

You can save the emergency funds in the following ways:

1. High interest offering bank accounts.
2. Money market account.
3. Certificate of deposits without penalty for withdrawing money before the maturity date.

Emergency Fund Tips.

1. Start to set aside a particular percentage of your income as your emergency fund with which you are comfortable. Once you adapt to it, you can increase the percentage of savings.
2. Avoid using the savings for instant gratification purposes.
3. Open separate accounts in the different banks to save funds out of sight and out of your mind.
4. Add the tax refund money to the emergency funds, which will help you build the reserve as soon as possible. You can also contribute the cash gifts from your family and bonuses to these funds to reach your target more shortly.
5. Earlier, the better. Start to build your emergency funds as early as possible. It will make the process comfortable for you.
6. Arrange for an automatic transfer of savings from your salary.
7. Avoid using the stocks for parking the emergency funds.
8. Enroll yourself in the emergency saving programs offered by your employer. 
9. Build the emergency fund during the months with high income rather than spending it on unnecessary luxuries. It will prepare you for the low-income months in the future.
10. An average American is unemployed between the jobs for five months.
11. If you are in a position that will need more duration of unemployment between two jobs, you have to plan for a liberal emergency fund. 
12. Set a realistic and attainable goal of keeping the portion of your paycheck aside. 
13. Be stubborn and stick to your plan of saving a certain amount of money each month. Do not fail and persuade yourself for a safer future.
14. An average percentage of Americans run out of emergency funds within a year. Set aside the emergency fund and make sure not to use it until a valid emergency pops in.
15. After achieving the goal of saving the emergency funds, you can start to save money for the more unavoidable expenses like house and car repairs.
16. Holding back on the unnecessary expenses and finding ways to save the money will help you to save money to keep the emergency funds easily.
17. During the emergency period, frugality is the key. 
18. Limit your expenditure by stopping needless online shopping, eating out, and buying useless stuff.
19. Review the amount needed to set aside as your emergency fund from time to time as it may change due to changes in your life situations. There may be an addition of a family member, promotion at work, or establishing a new business.
20. A wrong financial decision can put you in a tight spot and can increase your debts. It can delay the time needed to build your reserve funds. Be cautious while making any financial decision, as it can create an emergency by itself.

Conclusion

“By Failing To Prepare, You Are Preparing To Fail”

By Benjamin Franklin.

Building an emergency fund with the entire six months of basic living expenses can be overwhelming and demanding. However, with a goal and plan in mind, you can pull off with ease.

Remember one step at a time, and you will reach your emergency funds goal ultimately. 

Slow and steady wins the race.