Many times, investors ignore their financial advisor’s guidance to build an emergency fund as they are mainly focused on investing in their long-term financial goals. However, an emergency fund can help you to continue to contribute to your financial goals if you ever experience a temporary loss of income.
The ideal location for an emergency fund is a savings account with a relatively high interest rate and easy access. This account, however, should be separate from the day-to-day account so that there is no temptation to use reserves for nonemergency needs. Try these 4 steps to help you build your emergency fund at any time.
1. Formulate a plan
Firstly, you need to determine how much money you feel comfortable having as a cushion in an emergency. Ideally, it should be no less than three months’ expenses. Then you need to disaggregate it into an affordable monthly savings goal that fits within your budget. This will make the task more attainable.
2. Automate your savings
It can be quite easy for the money that was originally set aside to be spent on other competing expenses, especially during these times. In order to remove that temptation, set up to have your savings automatically transferred into your emergency fund.
3. Use only for emergencies
You may be tempted to dip into your emergency fund for a variety of reasons but if you continuously keep depleting the fund for everyday life expenses, it will not available when really need it. It is essential when you are setting up your fund, to predetermine what type of known expenses the money can be used for along with the unexpected ones.
4. Assess and adjust contributions
As with everything in financial planning, it may be necessary to make adjustments to your plan as your financial situation changes. Just remember that having a reserve can mean the difference between weathering a short-term financial storm or going deep into debt.