Safeguard an Emergency Fund
Safeguard an Emergency Fund
Before I talk about how to safeguard the emergency fund, let me tell you what exactly I mean by an emergency fund. An emergency fund is like creating a pool of funds and parking it somewhere safe and having a strong will to use them only in cases where you are facing a situation like – “Job loss,” “health emergency,” etc.
Every reader must have found some good old currency notes in their pockets which they some way or another completely forgot about, can you imagine the smile or relief on your face?
That is what we call an emergency fund, park it safely and forget about it till rainy days.
As a general practice, it is good to have a minimum of 3 times and a maximum of 6 months the monthly expenses as an emergency fund. This money will make sure that you don’t suffer a financial crisis or fall yourself in the debt trap whenever there’s a critical situation. Of course, you need time to save around three to six months of expenses, but it will not be difficult if you spend wisely and prioritize having an emergency fund.
How to Do It?
You don’t need to put all of your pay check amounts straight into the emergency fund. Simply, prepare it in your budget plan, set goals, and start with keeping aside a small amount. Regardless of whether you figure out how to set up just $10 to $30 aside consistently or month, your just-in-case account will progressively develop.
- Remember that financial institutions do not provide separate accounts for emergency funds. It depends on an individual to set up this account and keep it under the capital reserve category to tackle with any personal financial crisis in the future.
- Now, in regards to safeguarding the emergency fund, it is a very common phenomenon that people create an emergency fund, but as soon as they face even a slightest of problem, they end up dipping their hands in ever so precious emergency funds. This isn’t a wise decision to go ahead with.
- Your emergency fund should be utilized only when there’s a crisis, and you are finding it hard to deal with it. Do not touch it for simple problems or to fulfill your desires like when buying an expensive dress, getting an exclusive collection of footwear, or throwing a grand party in your favorite club. The purpose of using your emergency fund should be wise and important.
Keep It Separate
For safeguarding, it important to note that you must not keep these funds in your savings account, and it is better to allocate them into a liquid fund (make sure they can be accessed easily when needed as emergencies won’t give you a heads up before striking you down). This is important because money in your savings account can be used for any purpose like when you want to buy a home, you want to celebrate your birthday in a grand manner, or when you want to go on a long vacation to your favourite destination.
However, the emergency fund is meant for critical circumstances only. So, the fund should be kept separate too so that there’s no mix up that might create a problem later. This will serve two purposes,
- A lot less tempting for you to erode the emergency funds
- You can earn a minimal interest in the allocated funds.
Investing In Emergency Funds
Individuals should consider building an emergency fund before stepping into uncertain investment vehicles like stocks. However, stocks carry long-term growth potential as compared to cash and its equivalents, but their value can decrease suddenly if any economic downturn happens. The recent coronavirus crisis is a major example. If things like these happen often, you have the chance to lose a lot of value. Your emergency fund protects you against this risk. So, keeping your hard-earned money into an emergency fund seems sound and wise.
How to Build An Emergency Fund?
Set a monthly savings goal: This will give you an idea about how much money you need to save every month to put up in the emergency fund. So, you will have clarity from the beginning only and can adjust your expenses accordingly.
Keep some change: You can always keep the change in your emergency fund account. This will help you to save a small amount of money every day or week, and you won’t even realize soon that money will form into a huge amount.
Save your tax refund: Saving your tax refund in the emergency fund account will make it easy for you to manage things. So, when you file for a tax refund, consider transferring the amount directly into the emergency fund account.