Life’s twists and turns often catch you off guard—you could lose a job, crash your car, require a home repair, or visit the hospital out of the blue. Aside from inconveniences, these instances are also hard on your pocket, and getting through them requires a robust financial safety net to cushion your savings.
Don’t fret just as yet. Read on to find out how to build an emergency fund and ensure you’re ready for any unforeseen financial challenges that may come your way.
How to Build an Emergency Fund in 6 Steps
You can build a robust emergency fund that provides financial stability to handle life’s surprises. Consider these strategies.
1. Determine your goal amount
How much should be in an emergency fund? The amount varies depending on your needs, but experts assert to reserve at least three to six months’ expenses. An excellent way to determine how much you require is by looking at your current spending for the following essentials:
- Personal expenses
- Debt repayment
You don’t have to include any expenses you’d naturally cut from your budget during emergencies, like vacations, entertainment, and other non-essential costs.
2. Create a designated savings account
Keep your emergency fund separate from your spending money and other savings, as you don’t want to dip into it accidentally when you need extra cash. A rule of thumb is to pick a bank and account⎯with low fees and high interest⎯you may quickly and reliably withdraw from so you can grow the fund over time.
A separate account makes using your cash reserve for quick purchases less tempting. Plus, it lets you track and keep your progress organized, making it easier to determine how much you’ve saved and how many months it can sustain you.
3. Review and adjust your monthly budget
Now that you have goals and a place to save, it’s time to examine your monthly budget. Track your income and expenses to see where your money is going. Here, a budget-tracking app might be helpful. Are there any areas where you can reduce spending to free up more cash?
Remember, you must prioritize your emergency fund; the last thing you want is an inadequate reserve when an emergency arises. So, find ways to allocate more money toward it without sacrificing needs. For instance, many people are paying for a media subscription they no longer use, so you might want to check and cut your streaming services.
4. Start with small, consistent contributions
Saving a hefty portion of your income for events that might not even come may seem discouraging. After all, you could use that extra cash for something else, like investing in stocks or using it as a down payment for a new car.
However, building an emergency fund doesn’t mean you must stash away a lump sum. Starting with small, regular contributions that grow over time is more manageable and realistic.
A simple way to do it is to set automatic transfers from your payroll account to the emergency fund every payday. A monthly ₱1,000 saving adds up considerably. Consistency is key. No matter how small, regular contributions gradually take you closer to your goal without straining your finances.
5. Save extra money
Whenever you receive additional money, like a tax refund, work bonus, lottery winnings, inheritance, or birthday gift, consider putting a portion or all of it into your emergency fund.
Remember to prioritize building your reserves over indulging in unnecessary expenses. This approach takes you closer to your saving goals without impacting your daily budget. Every peso you add counts and goes a long way to cushioning your finances during emergencies.
6. Adjust your savings regularly
Your financial situation can abruptly change in the snap of a finger, so regularly adjusting your target is essential. For example, if your income drops, it won’t be sustainable to maintain the same monthly transfers to your emergency fund. Conversely, a higher income stream means you can add more.
Flexibility is essential when saving, and adjusting your plans and goals as needed helps you stay on track when life throws curveballs your way.
Where to Keep Your Emergency Fund
When a financial emergency arises, you must be able to access your funds immediately. As such, it’s best to keep it in strategic places.
1. Regular savings account
A typical savings account with an ATM card is a common place to keep your emergency fund. It keeps your cash liquid, allowing you to access your money quickly during emergencies. However, the drawback is that they typically offer lower interest than other options.
2. High-yield savings account
A high-yield savings account is an excellent alternative to regular ones because they offer higher interest rates at around 4%. Your money can grow faster, even if you don’t contribute much. Note that some high-yield accounts don’t offer ATM cards or aren’t as commonplace as regular ones.
3. Money market account
Banks and credit unions sometimes offer money market accounts, providing higher interest rates than the other options. They also have checking and ATM capabilities for greater accessibility. On the other hand, most money market accounts have minimum balance requirements, making them less ideal if you belong to low-income savers.
Secure Your Finances with an Emergency Fund
An emergency fund creates a safety net to protect your wallet when unexpected challenges occur. The above steps can help you build one effectively, ensuring your money is readily accessible when needed.
Another way to address immediate financial needs is via a loan, with Asialink Finance Corporation as your go-to partner. We provide online financing options with agreeable terms and low interest rates to help you overcome life’s challenges without worry.