As much as we have "Life Policies" and "Funeral Policies" in place, preparing for life’s unexpected events, an Emergency Fund should also be at the top of the list as the unexpected can happen.
It seems that, in this economy, a lot of people are thinking seriously about their Emergency Funds and for many, thinking about how to start an Emergency Fund from scratch. And this is a very good thing – emergency funds are a key part of a healthy personal finance situation. However, the biggest problem, is that it’s intimidating – three to six months is a lot of savings but it is possible.
But before we start, let's unpack what an Emergency Fund is. An Emergency Fund is cash that you’ve saved up to cover unexpected costs that come with everyday life. The sole purpose is to help you maintain your normal life through the emergencies you may face in future. You're retrenched from work. Your geyser may burst and might need a costly treatment. Your car could break down and require expensive repairs. Your appliances could be damaged and you have to replace it. Anyone of these unplanned expenses could have a large impact on your budget by hundreds or thousands of Rands and an Emergency Fund is always worthwhile because you won’t be caught off guard without the means to resolve whatever may come at you.
How to start an Emergency Fund?
So, the first step in starting an Emergency Fund is setting a realistic and reachable goal. It is suggested to build and maintain an Emergency Fund with three to six months’ worth of living expenses. Many people set a gigantic goal for their Emergency Fund right off the bat and then find that it’s very hard to get there. Six months of living expenses is an enormous goal, one that may take years to reach – and along the way, you’re might get disheartened.
Instead, a great way to start is to set a more reasonable monthly savings goal to start off with. On a monthly basis set aside an amount towards your Emergency Fund. Consult your Budget to determine what is manageable and possible for you. And set up the funds for automatic transfer to a savings account. That way, you will be saving money without even thinking about it.
Where Should You Keep an Emergency Fund?
Consider keeping your Emergency Fund in a Savings account that will give you quick access to the money when needed. The idea is you shouldn't touch the emergency fund at all – it just sits there earning a bit of interest and waiting until you actually need it.
Keeping track of your Emergency Fund
Building your Emergency Fund will require consistency and discipline. Try set milestones for yourself to keep you on track. For example, you can say "I want to save a month worth of living expenses within the next 6 month". Once you've hit that first milestone – and it’ll feel good, set another milestone for yourself. And just keep watching that emergency fund grow.
Obviously, when you do have an emergency, tap into that fund. Don’t put your car repair bill on the credit card, use your Emergency Fund to fulfill such needs. The key to building an Emergency Fund is to set money aside every month, no matter how small the amount. Just keep setting goals for yourself and keep pushing yourself just a little to make it there. Before you know it, your life won’t be disrupted by these kinds of emergencies.