In my previous post on financial literacy, I touched on the importance of understanding money-related dynamics. That means understanding that anything can happen that might cause a significant imbalance in your income and financial goals. However, that shouldn’t be the case.
I know you are eager to know the tips on how to build your emergency fund, but first, I will explain why I started saving for emergencies. I am a freelance writer and blogger. I say my profession because it is my source of income, and with it comes irregular work schedules and thus paychecks.
This means I can get a ton of work in a particular month and very little to no jobs the other month. The uncertainty that comes with this payment plan made me think of how I could shelter myself and my lifestyle in the “low months.”
One day as I was ‘Netflix and chilling,’ I came across a series called “The Smart Money Woman.” This series really changed my perspective on money management.
There’s a quote from the series that ‘lives on my mind rent-free,’ which I hope will do the same for you. It says, “Being broke means if you lost your source of income today, you wouldn’t be able to sustain your lifestyle with the assets you have.”
As funny as it might sound, I would be broke within three weeks tops if I’d lost my clients that exact day. I’m sure you’ve asked yourself that question, and 7 out of 10, I can say you figured you’re broke! Bummer, right?
That was the day I decided to commit to building an emergency fund.
What is an emergency fund?
An emergency fund is the amount of money you set aside purposely for rainy days and situations. Think of it as your shelter or security in times of financial distress.
The previous years (2020 and 2021) have brought about an economic crisis, and the lockdowns have worsened the situation. So, as much as emergency funds should typically cover between three to six months of bills and expenses, I believe one year is a safer option.
I’d say the more you can save, the safer and more confident you feel in sustaining your lifestyle for longer. Which is a perk, right?
However hard you think building an emergency fund is, here are three suggestions to ease your fear and help you start building it.
1. Set achievable goals, no matter how small they are!
You might have read this article until here and decided to start building an emergency fund. Great! However, that doesn’t mean you should target to save six months of expenses in one month, far from it.
You should build your emergency fund as comfortably as possible, so it doesn’t bore you as soon as you start. For example, if you expense for six months total to $6,000, you can opt to save this money over a three-month or six-month duration, or even weekly. That will simplify it to $2,000 monthly for three months, $1,000 monthly for six months, and approximately $230 weekly.
The important thing is not to over calculate your emergency fund. If you put it at $6,000 for six months, this means your monthly income covers that. Simply put, you cannot aim to save $230 weekly if your income is $300 weekly. How will you cover your bills and still save $230 from this money? Isn’t that unrealistic?
For example, in the above scenario, you can opt to save $50 weekly from your income as your emergency fund. It might take longer to reach your goal, which is still okay. The goal here is to save for rainy days, not live in the rainy days while saving. Small achievable goals is the phrase.
2. Set up a direct deposit plan or Standing order
Here’s a tip! You should build your emergency fund separate from your regular savings account. Most banks allow this for this arrangement. This will save you the headache of tracking your emergency savings from your regular account.
Now, most employers have no problem sending funds to separate accounts at your request. Requesting your employer to directly deposit maybe 10% of your income to your emergency fund account will save you the trouble of doing it yourself. Moreover, you won’t feel the pain of saving as the funds will not touch your hands at all!
As a freelancer, I receive my payments through various online payment platforms from where I send my money to my bank. As I am disciplined, I am used to sending a specific percentage of my payments (seeing as it is not always the same) to my emergency fund account.
If you are a freelancer too and doubt if you can save using my technique, I suggest you place a standing order with your bank. This way, the bank sends a specific amount of money to your emergency fund account as per your instructions.
Be a clever woman or man! Building an emergency fund is not as hard as it seems, as you can see up to this point.
3. Spend Lower than your Means, and Avoid Credit Cards
All I can say here is that credit cards are a hindrance to achieving those financial goals you have set. Moreover, living beyond your means is an enemy of progress!
The goal is to live comfortably rather than extravagantly. I’m not saying living a luxurious life is wrong, far from that. The question here is, can you afford it? Or can you maintain it?
If your answer is no, then you need to build an emergency fund so you can live that extravagant life in the future. Financial security is more important than partying all day for the whole month while using your credit card to pay the bills.
I call credit cards “easy money” because you spend blindly and end up spending too much in the end. Having too many credit cards drives you into debt fast. We don’t want that! What we want is to build that emergency fund and secure our future financially.
I encourage you to use a debit card and cut out those many takeout orders. You can maybe limit them to once to twice a week and cook in the remaining days. You might not save a significant amount of money, but hey, adding that $20 you’ve saved is way better than zero. Isn’t it?
My Final thoughts
Building an emergency fund is as hard as you picture it! If you start today and follow the above tips, you won’t even notice how fast you save.
Also, do not stop once you reach your emergency fund goal. You can never save enough money. I would advise you to return any money you use for emergencies from your emergency fund account. An emergency fund should be the same amount you calculated it to be or more to cover your expenses during financial distress.