When it comes to managing your finances, it’s easy for people to tell you that you need to prepare for absolutely everything. However, the truth is that life can often be unexpected. Even if you carefully budget for every monthly expense you think you’re going to face, there’s always a chance that something could come along and throw a curve ball at you and your family.
With that in mind, one of the easiest ways to prepare yourself is to build an emergency fund. This is basically a cash safety net that you can hold in a liquid and accessible account. You can draw on this money if you have an unexpected situation or expense that your standard income wouldn’t cover.
An emergency fund means that you don’t always have to turn to personal loans when you’re struggling with last-minute expenses. Although sometimes you may choose to use lenders such as Omacl Loans in order to do this, so you can keep hold of your emergency cash for a little longer.
How do you create an emergency fund
The first step in building your emergency fund is deciding how much money you need to lock away. How much cash you should have put aside can vary depending on who you ask. Most experts recommend keeping at least three months of your wages available at all times. This will ensure that you also have time to find a new job and still pay your bills if you lose your employment.
Initially, when you’re building your emergency fund, you might need to rely on other forms of lending and extra cash to help you out during complex situations. However, once you’ve decided on an amount that’s suitable for you and started saving, you’ll have more peace of mind and security.
To ensure that you’re saving the right amount, think about your fixed monthly expenses, and how much cash you generally have going out on a regular basis. Your fund should be able to cover things like loan repayments, housing expenses, insurance, debt repayments, credit cards, and so on. Other expenses to consider include:
- Food and essentials
- Utilities at home
- Personal living expenses
Once you’ve taken the time to understand how much outgoing cash you dedicate to these categories each month, you can have a better idea of what you really need in your emergency fund. You may also think about adding extra money if you have children, as the very presence of children can often increase your chances of having emergency costs to think about.
How to start building your fund
Once you know how much money you need, the tough part is actually building that safety net from scratch. The easiest option is usually to open a separate savings account with your bank that you can put a small portion of your income into each month. You can set up an automated payment so that the money naturally goes out of your current account and into your savings fund without you having to think about it.
To boost your chances of building your fund a little faster, look for expenses that you can cut in your current budget. Switching to a cheaper electricity or broadband provider could give you more money left over at the end of each month. Cutting down on the number of times you buy coffee on the road to work each morning is a helpful step too.
Even the smallest changes to your daily routine can make a massive difference to your emergency fund. Plus, remember that you don’t need to be putting huge chunks of cash away initially either. Putting just £10 a month away means that you’ll have £120 at the end of the year – which is much better than nothing. You can also start adding extra cash whenever you find it, from bonuses at work, or when you sell the items you don’t want in your garage.
Use your fund correctly
Depending on how much cash you want to have access to in your emergency savings, it can take a while to initially build the money you need. However, once you’ve got that cash there – remember that it’s not intended for you to use on anything you choose. This is cash reserved for emergencies only. If you know that you can wait for something, then leave your emergency cash untouched.
It might even be worth setting some limitations on your savings account so you can’t use it accidentally. For instance, why not avoid having a debit card for that account?