Emergency Fund What it is and Why you Need One

July 17, 2023

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An emergency fund is money that you have set aside to plan for unforeseen life events.

What is an emergency fund and how do I set up one?

An emergency fund is money that you have set aside to plan for unforeseen life events. If youve ever been in a situation that needed financial assistance immediately, then you know how important it is to set up an emergency fund. It may sound catastrophic, but the life you are living now may not be that way tomorrow or in the next few years.

You may end up losing your job, get laid off or have a serious medical emergency that you need to attend to. If you worry even a little about your finances and you have financial goals, you cannot afford having these situations put you in a financial dent.

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Having no emergency fund means you are going to live a life full of debts because now you have to take out loans to finance these emergencies.

Setting up an emergency fund today is what any wise person can think of doing.

In this article

How to Set Up an Emergency Fund

Here is how you can set up an emergency fund today.

1. Know the amount of money you need for an emergency fund

This is the first step you need to take towards setting up an emergency fund. Start by evaluating your current income and see how much you have to set aside to last you around 3 to 6 months in case of a life emergency. This time frame is the recommended period for which an emergency fund should last you.

The amount of money you need to set up an emergency fund depends on the job you are doing. If you have a job that is paying you well and is stable, you can contribute a lot of money to your emergency fund for the short term. If you risk losing your job at any unexpected time, you have to plan to save more to your emergency fund so that it can cover you for the longer term.

2. Open an account to keep your emergency fund

You need to open a bank account and set up an emergency fund. When you decide to set up an emergency fund visit your preferred bank and have them open a suitable account for you. If a bank allows you to have an emergency fund as a high interest savings account, then that is what you should go for. You can have your emergency fund savings account locked so that you only use the money for emergencies and not whims.

Alternatively, you could set up a money market account to hold your emergency funds. The key is looking for a savings partner that will allow you immediate access to your cash in case of any such emergencies.

3. Have saving goals

A good way to set up an emergency fund and contribute money to your account is to have goals. Having saving goals paints a clear picture of how much money you need for emergencies and how you are going to raise this money. You can have either short term or long term saving goals depending on how much you can foresee a life altering event.

Make it a point to put enough money into your emergency fund before it happens.

4. Leave emergency fund savings up to the bank or asset manager

As you set up an emergency fund, leave the saving process to the bank or asset manager. You have to automate this process if you are ever to save any money for an emergency. Now, dont get me wrong here. If you have financial discipline you can commit to contributing money to your emergency savings account without any assistance.

However, for those who struggle with making financial decisions, set up a standing order with the bank on the amount of money you want to be automatically transferred to your emergency fund savings account from your bank account.

5. Be consistent with your savings

Setting up an emergency fund means that you have to be very consistent with how you put money into your account. This is why I recommend putting a little amount of money into your savings and then growing your limit as you keep on. Consistency is key. If you stop putting money into your emergency fund for any reason, the amount of money you have will not grow.

This will not go over well for you in case of an emergency. Stick to your savings plan and you will reap good benefits.

How to Build an Emergency Fund

Youve now set up your emergency fund. That alone is not enough. You must start contributing money to your account in order for you to have an emergency fund. You can build your emergency fund actively or passively.

Actively building an emergency fund means you put money directly into the account. Building your emergency fund passively means that you develop certain habits and instill discipline when handling your finances, in order to have money to save for emergency.

Take these steps and build an emergency fund today.

1. Multiply your income streams

Setting up an emergency fund requires you to have multiple income streams. You cannot rely on one job to raise funds for an emergency, all while taking care of other expenses. You have to diversify your income streams and grow your savings faster. One way to do this is to start a side hustle and put this money in an emergency savings account. If there is any unexpected income you can get like bonuses, you can use that to build your emergency fund. Moreover, returns from investments can be used to build an emergency fund. Start investing in stocks, index funds or real estate if you want to raise money for an emergency. You can easily invest in US stocks with Hisa App. Download it on play store and fill your investor profile to start trading.

2. Eliminate short term debt

Debt is a great hindrance towards setting up an emergency fund. This is because, with the income you will get, youll be spending most of it to pay off debts. You will end up being left with little to no money to set up your emergency fund. In order to set up an emergency fund, start by eliminating any debts that are holding you back. Once you have eliminated this debt, you can then move forward with setting up an emergency fund.

3. Adopt good financial habits

You need to adopt good financial habits before setting up an emergency fund. Good financial habits include cutting down on unnecessary expenses, budgeting, investing, avoiding impulse buying, avoiding overspending and living within your means. When you do this, you will be able to have funds to set aside for an emergency.

You cannot set up an emergency fund if you live frivolously and waste away all your money. Positive financial habits ensure you save money for an emergency.

4. Track your expenses

A lot of us are guilty of not knowing where our money has gone to, a few days after receiving our paycheck. If this sounds like you, you need to track your expenses. Oftentimes youll find out that you end up wasting money that can otherwise be set aside to build an emergency fund. Always track your expenses and fund out where your money goes.

You can create a list of expenses and see which ones are unnecessary and cut down on them. Once you eliminate all these extra expenses that you dont need, your emergence savings account stands a chance to grow.

5. Live within your means

We live in a society that thrives in showing off. When someone buys a new house or a new car, they do not hesitate to share it on social media. This leaves a lot of people trying to play catch up by ascribing to a life thats not theirs. If this sounds like you, you need to stop. If you can not afford the luxury lifestyle at the moment, do not force it. Dont move into that house, dont buy that car and dont eat out often just yet.

Living above your means means that you will have to take out loans to fund your lifestyle. This is detrimental to your saving goals for the emergency fund. Learn to evaluate your current financial situation and live a life that will allow you to achieve your financial goals.

6. Stop living paycheck to paycheck

Living paycheck to paycheck means that you cannot hold yourself out to the end of the month until you receive your next paycheck. If you are living paycheck to paycheck, then it means you either have high debt or do not plan your finances effectively. You end up overspending, impulse buying or building up on unnecessary costs. Living paycheck to paycheck can hinder you from building an emergency fund.

If you want to get out of this loop, you must start by identifying the reasons why you live paycheck to paycheck and give solutions to these situations. If you can do that, it will be easier to start building an emergency fund and meet your savings goals.

Takeaways

There are many benefits you can get from setting up an emergency fund. These benefits are not limited to living a more fulfilling life, accomplishing your financial goals, keeping yourself out of debt and instilling financial discipline through saving.

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With an emergency fund, you dont have to live life thinking about where and how you will raise money in case of a life crisis that needs financing. You know that your money and your life is secure and you can easily get things back on track once you have attended to the unexpected life situations.

Start thinking about setting up an emergency fund. Dont live a life borrowing from banks and people to help you in case of an emergency. When you set up an emergency fund today, you will always be one step ahead of these life occurrences.