Building Financial Security: An Easy Guide to Building Your Emergency Fund

Maintaining good financial stability involves having additional funds in one’s account, as life is unpredictable and unforeseen circumstances can disrupt even the most well-planned budgets. Consider the story of a friend whose parents live a comfortable lifestyle and have access to quality education for their children, among other luxuries. Suddenly, the father faced an unexpected financial crisis that almost resulted in the family losing everything, forcing them to sell their properties. Their emergency funds could have mitigated such an urgent disruption if they had known to save some money. Now, you see the importance of building your Emergency Fund.

Reports from Investopedia state that one in four Americans have no retirement savings at all, and the median emergency fund balance among workers is a mere $5,000. Moreover, over the past few years, several reports have also indicated that 50% of Americans would need to take on debt to pay for a $1,000 emergency.

We did a art one on, What is an Emergency Fund, and why you should consider having one? This blog will delve into the importance of emergency funds, how to build one, and financial apps to help you secure your financial future.

Understanding the Importance of Emergency Funds

An emergency fund serves as a financial helper, providing a safety net during unexpected situations. Helping you  weather the storm without having to rely on high-interest loans or credit cards, regardless of the circumstances—medical emergency, auto repair, or unexpected job loss. We have a more detailed blog post on the why’s of building an emergency fund. 

Ways to build emergency funds:

1. Set a realistic goal:

When it comes to building your emergency funds, it’s always best to set a realistic goal that won’t put too much pressure on you. 

So, instead of putting away three to four months’ worth of your active income at once, first, determine how much you need to save and avoid overburdening yourself with an amount you can’t afford. You can also consider finding a side hustle that can provide additional income for the account. Alternatively, divide your active income in half and decide how much to contribute to the account consistently. The idea is to avoid debt and reduce financial stress caused by unforeseen circumstances. 

Some facts: 

According to the Transamerica Retirement Survey, setting achievable savings goals can help increase your financial resilience. Having specific savings goals in mind can help you weather unexpected financial challenges. Additionally, research by Experian shows that by age 50, you should aim to save six times your annual salary. By age 55, aim for seven times your annual salary saved. By age 60, aim for eight times your annual salary saved. And by age 67, aim for 10 times your annual salary saved. Remember, starting with a smaller goal is always a good idea, and progress is progress, no matter how small.

2. Create a budget:

The National Endowment for Financial Education (NEFE) reports that “individuals who follow a budget are twice as likely to achieve their savings goals.” Creating a budget is a foundational step in effective financial planning. 

Determine which expenditures can be reduced; by identifying the types of unforeseen emergencies that have previously befallen you, and setting aside a portion of your income for an emergency fund are all aspects of decision-making that should be grounded in the data (your monthly income and expenses). You choose to create a budget for your monthly contribution to your emergency funds.

3. Start small:

Starting small is the key to investing success. In fact, behavioural economics studies, such as those by Richard Thaler, emphasize the impact of starting with manageable contributions, which have proven to lead to sustained financial habits. 

Remember, it’s okay to have a small amount of money to invest in the stock market. Begin with a modest amount that will fit within your budget, whether it’s $30 or $100 per month. The most important thing is to be consistent, even if it’s a small contribution each month, which will help you build your investment portfolio over time and achieve your financial goals.

4. Cut unnecessary expenses:

By taking a proactive approach to your finances, you can identify areas where you can reduce your expenses and increase your savings. One effective way to achieve this is by challenging yourself to a “no-spend” week and avoiding discretionary costs such as daily pizza orders, morning coffee, and unnecessary subscriptions. By redirecting the funds saved from these expenses to your emergency fund, you can make significant strides toward achieving your financial goals.

Related: How to cut daily unnecessary expenses 

5) Explore additional income streams:

Look for other ways to monetize your skills; for instance, consider side hustles or freelance opportunities to boost your income and direct the extra earnings toward your emergency fund. You should check our blog posts on Passive Income Ideas and make extra income

Sell unused items: Why not turn unnecessary items into extra cash for potential emergencies? Selling unused items could not only declutter your space but also help you build up your emergency savings.

6. Automate savings:

Building an emergency fund is a fundamental part of financial planning. However, it can be challenging to set aside money regularly. To help overcome this challenge, consider setting up automatic transfers to your emergency fund and treating this as a non-negotiable monthly bill. By doing this, you’ll eliminate any excuses and make saving for emergencies a top priority.

7. Separate your emergency fund:

Creating a separate emergency fund is a wise decision that will help you be more financially secure. A survey by Bankrate indicates that individuals with different savings accounts for specific goals, like emergencies, are less likely to dip into those funds for non-emergencies. This way, you’ll be less likely to spend money on non-emergencies when you have a separate account designated for emergencies. Additionally, there are bank accounts that offer the convenience of withdrawing or transferring money from your mobile phone using a cheque. These options are available to help you avoid unnecessary spending and maintain a substantial emergency fund.

8. Think Twice before you borrow: 

“Never borrow without thinking twice! While borrowing may seem like a quick solution to your financial problems, it can end up putting you in debt and cause more issues in the long run. It is crucial to make realistic decisions and explore other options. Consider other options, such as cutting back on expenses, taking on a side job, or selling unused items around your home.  

Additionally, prioritize paying down high-interest debts before you start building your emergency fund. This way, you can prevent accumulating interest and free up more funds for your savings. Remember, taking these proactive steps can help you achieve more excellent financial stability and peace of mind.”

More: Financial Options to Consider Before Borrowing

9. Windfalls and Cash Windfalls:

The IRS reports that millions of Americans receive tax refunds annually. “Make sure to allocate any unexpected windfalls, such as tax refunds, work bonuses or monetary gifts, directly to your emergency fund. This will help you build up your savings and be better prepared for any financial emergencies that may arise. 

Cash Windfalls:

Additionally, if you receive unexpected cash, like loose change or cash gifts, consider saving it in a jar and periodically depositing the accumulated cash into your emergency fund. This is a simple and effective way to boost your savings and ensure you are financially secure.”

More: 

What is Windfalls and Examples

What is Cash Windfalls and Examples 

10. Reevaluate and Adjust:

It is advisable to regularly scrutinize your budget and modify your savings goals in line with the evolving financial situation. As your revenue escalates, it is prudent to apportion a more substantial portion of it towards your emergency fund. This practice ensures that you are adequately prepared for unexpected expenses that may arise.

Related: 9 Essential finance terms you must know.

Apps to Help Build and Manage Emergency Funds:

Qapital:

  • Qapital enables users to set savings goals and automate contributions based on personalized rules. It has been recognized by financial experts for its user-friendly interface and effective goal-setting features.

Digit:

  • Digit’s AI analyzes spending habits to automatically transfer small amounts to a savings account without requiring active input. It is endorsed by financial advisors for its seamless approach to saving.

Acorns:

  • Acorn is a micro-investing platform that facilitates the investment of spare change by rounding up everyday purchases to the nearest dollar. This unique feature makes it an ideal option for novice investors who intend to start small. Acorns’ innovative approach to micro-investing has garnered positive reviews and has earned the platform praise for its accessibility and ease of use.

Chime:

  • Chime’s “Round Ups” feature is designed to simplify savings for its users. By rounding up transactions to the nearest dollar and transferring the spare change to a savings account, Chime makes it easy for individuals to automate their savings. Due to its user-friendly interface and innovative features, Chime is highly recommended for those who want to save money effortlessly.

Simple:

  • Simple is the ultimate mobile banking app that enables users to set up savings goals within their accounts. It is the most popular choice for individuals who seek a clear and comprehensive overview of their financial progress towards each goal. With Simple, you can take complete control and ease to financial independence.  

Clarity Money:

  • Clarity Money is the ultimate solution for all your financial management needs. With its top-notch features, it enables you to easily track your spending, identify subscriptions to cancel, and provide insights for efficient saving. Our recommendation is to use Clarity Money, as it is widely endorsed for its comprehensive approach to financial management and budget optimization. 

Goodbudget:

  • Goodbudget is an exceptional app that follows the tried and tested envelope budgeting system to perfection. It helps you allocate your funds for different purposes while building an emergency fund. If you’re looking for a disciplined budgeting approach and a clear visual representation of your allocated funds, then Goodbudget is the way to go. I highly recommend it!

YNAB (You Need a Budget):

  • “YNAB is a great tool for creating a budget and assigning funds to various categories, including emergency funds. Financial professionals have praised its proactive approach to budgeting, allowing users to assign specific jobs to every dollar.”It’s exciting to think about what the future holds for YNAB. With its proactive budgeting approach and ability to assign every dollar a job, I can only imagine that even more financial professionals will praise its effectiveness. 

Cleo:

  • Cleo provides budgeting features and can analyze spending patterns to suggest how much users should save. Without a doubt, Cleo is the go-to option for those who want tailored financial advice powered by AI insights.

Empower:

  • Pay attention! Empower is an exceptional financial tracking app that offers personalized insights, enabling users to save more effectively. It is strongly recommended for its comprehensive features, which make it a valuable tool for enhancing savings habits.

Conclusion

Using these tips, coupled with discipline, can make building and managing your emergency fund more convenient and practical. So, choose an approach that aligns with your financial goals and preferences.

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4 Comments

  1. Thanks for sharing an amazing and informative Blog.

  2. Building Your Safety Net: A Quick Guide to Emergency Funds
    Financial security starts with a safety net. An emergency fund can be your shield against unexpected expenses, like car repairs or medical bills. Here’s a roadmap to get you started:
    Set a Goal: Aim for 3-6 months of living expenses. This is a good buffer for most emergencies.
    Track Your Spending: Knowing where your money goes helps you identify areas to cut back and free up cash for savings.
    Automate Savings: Set up regular transfers from your checking to your emergency fund. This “pay yourself first” approach ensures steady progress.
    Find the Right Account: Choose a high-yield savings account for easy access while keeping your money safe and growing slightly.
    Be Consistent: Even small, regular contributions add up. Every rupee saved strengthens your financial safety net.
    Remember, an emergency fund is for emergencies, not everyday needs. By building this safety net, you’ll gain peace of mind and be better prepared for life’s unexpected bumps.

  3. Excellent ideas on building emergency funds. I’ve worked for a long time but didn’t realize the importance of setting aside some funds for emergency issues until i landed in one last year. Wasn’t easy to get out but i’m thankful that i’m learning how to do this now.

    Thanks for sharing

  4. Hello,

    The information is advantageous.

    Thanks.

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