5 Steps on How to Build an Emergency Fund

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how to build an emergency fund

Admit it, life is good.

In today’s world, everything you want is just around the corner. You have a job that pays well and a bunch of credit cards that gives you access to funds anytime.

All you have to do is drive to the nearest store and wham, you’re back with the latest and shiniest gadget your heart so desired.

But while spending is alright as long as you can pay without drowning into bad debt, have you ever thought of building your safety net in case tough times pop up from the good life?

This safety net, which catches you in case you fall hard, is what’s often called “Emergency Fund.” It is an amount of cash you save to help you get through your daily life in times of emergencies.

Many of us never realized the importance of such fund until an emergency happened and we had no one to turn to.

If you don’t have that fund yet, it’s about time to get yourself one. Here are some tips on how to build your emergency fund.

Knowing your net income is the key on how to build an emergency fund

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Your net income is what you get after paying your liabilities and expenses, such as utility and credit card bills, insurance, and monthly amortizations to name a few. (Note: This is different from your net worth. We’ll talk about that in another post.)

Update March 1, 2015: What is your net worth?

If you have no idea how much this figure is, you don’t know how much you can allot to your fund.

Have a budget and stick to it

Most of the time, it’s impossible to know your cashflow in one go. What you can do is allot 30 days to list down your daily expenses. Add all these up at the end of the month and you’ll get your approximate expenses. This amount would constitute your monthly budget for expenses. Nothing more…but it can definitely be lesser than this amount. If it’s 50% or 70% of your income, great. But if it’s 100% or more of your income, you definitely have work to do. Budgeting allows you to have financial control because it forces you to see how fast your money leaks out of your wallet. It is a goal-setting mechanism that challenges your mind to take action…in this case, avoid overspending.

Pay your debts

This is quite crucial as it will be nearly impossible to start saving anything if you have unpaid debts, especially credit card debts that pack huge interest rates. If you have unpaid debts, we recommend taking on this problem first.

Climbing your financial goal would be a lot easier if you unload some of your stuff before you start the climb.

Save and build a saving habit

Saving is difficult and that’s a fact for most of us. Saving, however, is just another habit that can definitely be acquired. Remember the aphorism: man is a creature of habit! Start small, even if that may mean saving 10 dollars a day. That makes for $300 a month and $3600 a year. Small is better than nothing at all. Don’t put it in an automatic savings account yet. Remember you’re building a habit, a conscious effort at the start. Put it in a place where you can see your wealth building up, your secret army growing every day. Save, save, and keep saving until it doesn’t hurt not to spend anymore…until it becomes automatic for you. The typical recommended Emergency Fund amount is 3 to 6 months’ worth of your expenses. Now don’t let that bother you too much. The important thing here is you have decided to take charge and start saving for your emergency fund.

Manage your finances

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Building your emergency fund, however, is the easy part. From now on, you will have to commit to managing your own finances, controlling your spending habits and paying off your credit card debts on time to avoid costly penalties. Otherwise, you might just find yourself digging into your emergency fund.

Takeaway

“Life happens”, as some people say. Emergencies are part of our lives as normal human beings. We cannot avoid them but we definitely have a way to minimize their effect on us and an emergency fund – aside from financial help and emotional support from our families – is one way to achieve it.

There is no better time to start building your emergency fund than right now.

Sources:

1. Image by pakorn/freedigitalphotos.net

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