As the year starts, you need to make sure that you have a tough emergency fund to support you for the rest of the year. If you have been saving for the past few years and you did not find any use for it last year, this fund should be intact. This should be the case if you have been saving money for it consistently over the last few years.
Your emergency fund should form the bigger part of your reserve fund. This is bundled together with your rainy day fund. The emergency fund is what you use when things do not go according to your plan. This can be anything from health issues where you need prolonged medical care or even being let go from work.
This is the reason why you need to have a tough emergency fund. This is because you are going to use it to continue on with life and stick to your budget even when your income is affected. The rainy day fund is there to help you deal with small unexpected needs. This is because when they are left unchecked, it could lower your emergency fund.
The reason for this is because when you keep on having small needs and you constantly dip into your emergency fund. The time will come when your main fund is severely depleted. If you come across a big emergency and your fund is low, it would not be able to support your needs. You could end up taking out a high-interest loan or relying on credit to get past your emergency. This could only put you in deeper debt and force you to be in the red early in the year. This is important to know as CNBC shares that average Americans have about $38,000 personal debt.
If you are wondering why you need a dependable emergency fund, here are just a few of the reasons why you have to work on saving for it.
You might think that you do not need a tough emergency fund because you can get a disability check from the government. However, you might have some out-of-pocket expenses that you were not able to account for. If you cannot perform chores such as mowing the lawn or even fixing a faucet leak, you might have to hire help. This can slowly shrink the money you have. If your emergency fund is dependable, you can use this to help make sure that you have enough money every month for your needs.
There could be numerous reasons and factors why you would retire early but it is a possibility. Some people work hard for it while others are forced into it. Those that planned for it would surely have enough in their savings to help them enjoy their golden years. However, if you are forced into early retirement, that is a whole different matter.
Disability is one of the factors why you would be forced into early retirement. If you are unable to perform your tasks at work, you could find yourself taking that retirement rather than force your way doing the same work. Not only will you put yourself at risk, but you could also put your colleagues and even the company in a risky situation.
Economic factors can also be a big factor in early retirement. There are instances as well where this ripples into the company you work for and they are forced to close shop. This can leave you out in the wind and into retirement sooner than you have planned. If you are still at the peak of your career, you might be able to find a job elsewhere but if you are nearing retirement, it might be difficult to land a job. You then would have to depend on a tough emergency fund to help tide you over until you find a stable source of income.
Life is very unpredictable and you can plan all you want but it will eventually take its own course. The Federal Reserve History shares that the recent Great Recession lasted 2 whole years. You could be planning for a family trip where you have everything prepared. This can include using your leave credit to booking flights and accommodations. Then a few days before your travel, natural disaster hits. You are unable to fly out to where you wanted to go
The same is true with life where you could be planning to work for a certain number of years only to be cut short by a family emergency. You might be leaving for work one fine morning then you get into a car accident. Natural calamity can also hit where you find yourself and your family displaced from your home. All these things might happen. And if you have a tough emergency fund, your finances are one less thing to worry about.
How to save for your emergency fund more efficiently
The examples above are just some of the instances where your emergency fund can really be of most help. That being said, you might now be wondering how you can ensure that you have a dependable reserve fund. Here are some things you can do.
Create a habit
There is no denying that you need to regularly save for your fund because putting it off for another day might end up with you not having any savings at all. In the beginning, it is perfectly acceptable to set aside small amounts but on a regular basis. This is because what you are trying to accomplish is creating that habit of saving.
As time goes by, you need to make sure that the amount increases as well. It can be a gradual increase because again, creating that habit is the focus. The more you get used to it, the easier it becomes over time. You start to set aside the funds for an emergency even without thinking much about it because it has become a habit for you.
Get a side gig
To help you put together a tough emergency fund, you can start increasing that amount you save. You can do this with the help of a side gig. There are people who choose to use their hobbies and find a way to earn from it. These are normally referred to as income-positive hobbies. This is a great way to earn extra money to help you save more for your emergency fund.
The idea is to look at your hobby and identify earning opportunities. It can be taking your baked goods to that weekend market. It can also be getting your name out there for businesses in your area in need of design materials. When you land a nice side gig that revolves around your hobby, you get to earn more money. This can help strengthen your emergency fund. All these while doing something you love.
Lower down expenses
To help you create a stronger emergency fund, you can also look at controlling your expenses every month. This way, you allocate a lot more of your income towards your emergency fund savings. A good place to start is your household budget where you have your expenses listed down. Identify the items that you can adjust down and commit to it.
There are a number of ways to help you save for your emergency fund and one is automating the process. You can have an amount automatically saved up and deposited into a specific account to help you get the process taken cared of. It also helps you save the money from impulse purchases because the amount is already out of your salary account before you get any ideas in using the money to go shopping.
There are a lot of reasons why you might want to have a tough emergency fund and a lot of ways to achieve that goal. The important thing is to understand why you need it, have a plan to strengthen your fund and follow-through with action.