Tips to Build An Emergency Fund

1. TIPS TO BUILD AN EMERGENCY FUND www.freelance2freedom.co

2. HOW TO BUILD AN EMERGENCY FUND? Building an emergency fund is important to have good financial health and its vitality can be understood by how Capt. Edward A. Murphy Jr. laid down Murphy's Law: “Anything that can go wrong will go wrong.” Murphy’s Law is a caveat to our decisions in life. It teaches us to be prepared for the worst as life can be unpredictable. The COVID-19 pandemic and its effect on the global economy have greatly highlighted the need for building an emergency fund and be prepared for the worst. An emergency fund will prepare you for anything that may be thrown your way and be your surety for uncompromised financial health. So, here is how to start building an emergency fund.

3. GETTING THE FIGURES RIGHT The first step is to figure out how much money you should put in the emergency fund. We all have different needs and in light of this, the size of your emergency fund should be in consideration of your income, lifestyle, dependents, and debt. Ideally, an emergency fund should be enough to cover your essential expenditure for at least three months. This means that you should be able to live off your emergency fund for 3 months with 0 income. This part of the fund is the long-term fund. The other part of your fund is to aid you in realizing any abrupt emergent expenses that are not covered by insurance. This is called a short-term fund of a lump-sum amount which should be replenished after every use.

4. WHERE TO PARK YOUR FUND AND HOW After you have an approximate idea of how much money you will require in case of an emergency, it is time to cut back on unnecessary expenses to start building the emergency fund. It is, therefore, helpful to set a monthly goal and keep it in a separate bank account. An independent bank account will keep away the temptations to fritter your efforts. When looking for a savings account to store your emergency fund, the main factor to be considered should be a high-interest rate.

5. MANAGING THE EMERGENCY FUND - INVESTING After you have gathered a considerable amount in your account, you will feel that the money is simply sitting in the account when, instead, it can be used for investment. However, before you decide to invest your emergency funds, you must remember the objective of building an emergency fund, which is accessibility to funds in case of an emergency. This calls for liquidity, i.e., the ability to have or convert your money in cash. Accordingly, you can manage your fund in a 15:15:70 ratio. This ratio allows you to keep 15% of your funds in cash with absolute liquidity. This can be the short-term part of your emergency fund. The next 15% can be parked in a secure savings account where you can earn interest over time. The rest of the 70% can be used for investing. Investing your emergency fund is an important step to not let the money lose its value by inflation. However, you must consider only those investments that are zero-to-low risk. This is because your emergency fund is not the capital you can afford to lose.

6. MANAGING THE EMERGENCY FUND -PRECAUTIONS Another aspect of managing your emergency fund is to be cautious of impulses to use it to take a vacation or pay the down payment of a loan or any other non-emergency expenses. Mindful use of the fund only for true emergencies is a necessary part of managing your fund. The emergency fund may seem a futile exercise, especially when you will see your funds not coming in use for years. But, not having to turn to an emergency fund is a real blessing. If and when a rainy day comes, your future self will thank you for keeping this money aside.

7. THANK YOU!