Times are tough and you need to have an ideal emergency fund to get through it.
The whole world is still going through a very challenging time with the global pandemic. Even world leaders are not spared. The health crisis sweeps through countries regardless of social or economic boundaries. This was the reason why a lot of states brought down a stay-at-home order at the start of the pandemic.
This was to help decongest the healthcare facilities and make sure that the sick are attended to and cared for. But this has rippled out of health care concerns and affected the economy as well as personal finances of people. In fact, CNBC shares that up to 46 million Americans had their emergency savings wiped out during this pandemic.
This goes back to the question of what is an ideal emergency fund? If you run out of your reserve fund, does it mean you did not plan well? Does it show how unprepared you are with the emergencies that come your way? Should you have done something differently that would lead to a different financial outcome.
First off, no one was prepared for the crisis. You did not know that it was going to happen, much more the scale of the problem. You cannot prepare for every single emergency that will come your way. The reason you save for your emergency fund is to soften the blow of unforeseen events in the future.
That being said, it is still a good idea to take a look at proven strategies to help you save up for future emergencies. The more informed and prepared you are, the better you can take on whatever life throws your way.
What you should know about Emergency Savings
The first thing you need is to understand what an ideal emergency fund should be like. Here are a few things to look into.
Understand its purpose
It is crucial that you understand the main purpose of your emergency fund. USAToday shares that 6 out of 10 Americans cannot cover a $1,000 emergency. It’s easy to lose sight of this when you are just starting out. There are times that doing it for so long and not needing it makes you question if it is really necessary. It has been there for a long time and you haven’t used it for anything.
Simply put, your emergency fund is there to cushion your fall when you have financial setbacks. It is critical that you clearly define what these setbacks are. This will help you understand the main purpose of your reserve fund. It can be as simple as a broken appliance around the house or when you lose your job.
List Down your Monthly Expenses
This is a crucial part of the process. It’s because your emergency should be able to cover your basic expenses. How will you put together a target amount you need for your ideal emergency fund if you do not know what your expenses are? Make a list of your monthly expenses and scrutinize every single item.
This starts from your core basic household expenses which are non-negotiable. Food, rent or mortgage payment, and utilities. Even medicine and insurance are important as well. Then you have other expenses to think of. List your expenses down according to priority to make it easier for you to decide which to cut out, if any.
Save 3-6 month of Your Salary
There are many schools of thought when it comes to how much you need to save exactly for your emergency fund. Some say $1,000 and others recommend up to a year’s worth of your expenses. But one idea is to focus on the amount of your salary, not the expenses. This can help you sustain your lifestyle when an emergency happens.
When you save up equal amounts of your salary, you are able to live a normal life despite emergencies. You still have the same amount of money you have before the emergency happened. Of course, you need to make sure that you still save and cut down your costs to stretch your budget. But saving equal amounts of your monthly salary is also an option.
What can your Ideal Emergency Fund do
To understand more about your emergency fund, here is what it should be able to do for you.
Financial Safety net from any Economic Crisis
The primary role of your emergency fund is to make sure that you would be able to cover all your financial needs during a crisis. This can be anything from an emergency house repair to losing your job. Sometimes, it can even be a medical emergency or being forced to retire early from your job.
This is the primary use of your emergency fund. It is not a fund you can use to justify buying your wants in life. Just because your reserve fund has been untouched for a number of months does not mean you can use it for frivolous expenses. You never know when you will need it. It is better for the money to be there when something happens.
Help you stay away from unwanted Debts
An ideal emergency fund can also help you stay away from unnecessarily piling on more debt under your name. The reason is that once you find yourself in an emergency without any emergency fund, your first instinct is to borrow money. You could start with people around you like family and friends. You then move on to other types of lenders. It can be the bank, pawnshop, or other payday loans.
The sad part is that because you need the money, you are willing to bite the bullet. This means high-interest rates on your loans or even using your assets as collateral. This can give you money you need at this particular time but what if your situation does not change as fast as you want them to? Then you are left with more debt and higher payment obligations every month.
Peace of Mind
Mental health is a hot topic especially with the world being plunged into a lot of abrupt changes. From the economy to businesses and even relationships, everything is affected. Having some back-up money help you to cross out one important item off your list. At the very least, you know you have the funds to help your family get through the crisis with food on the table and with your lights on.
This will also allow you to focus on trying to get back up on your feet without having to worry about your finances. At least for the next few months. The stronger your emergency fund is, the more months you have to fix your finances. You get to buy food, pay for the house, utilities, and other expenses to live a normal life.
Having an ideal emergency fund is crucial in times when you find yourself in a difficult situation where your finances are affected. Regardless if it is a home repair or an abrupt change in your employment status, your reserve fund can cushion your need. Keep in mind that putting together a reliable fund is hinged on creating the habit of saving money. The best time to get started was yesterday but the second-best time is today. Start now and your future self will thank you.