5 Smart Steps to Building Your Emergency Fund

It’s always better to be prepared for anything that’s unexpected—and when it comes to your finances, nothing better prepares you for the unexpected than having an emergency fund. As its name implies, it’s money that you use for an emergency. It could be a serious disease, job loss, urgent home repair, or anything that needs spare cash. This is where an emergency fund comes useful.

Here are the simple steps to create your emergency fund:

  1. Have a savings goal. How much will you save monthly? Set your goal for the amount to be saved and stick to it. Experts recommend that you save or set aside at least three months’ worth of living expenses. You can start small and aim higher as time goes by. Consider creating an auto-debit arrangement so that a fixed amount goes to your account automatically at certain intervals.
  2. Keep it in a separate savings account. This is a perfect balance between accessibility and resisting the temptation to make more withdrawals than needed. If you want a higher interest rate so that your fund will grow over time, you may opt to put it in a money market account.
  3. Reduce your expenses – When you can’t hit your savings target, adjust your expenses accordingly. You can just prepare home-cooked meals instead of dining in restaurants, or go carpooling to save on gas costs. Any little amount will go a long way.
  4. Create more sources of income – Relying on your salary alone might not be enough to cover all your expenses, including your emergency fund. You can earn more by having passive income (through mutual funds or stocks), taking an extra part-time job, or selling unused items at home.
  5. Spend it only for emergencies – One common mistake people make is that they use it for non-emergencies. Expenses such as annual taxes or car insurance and maintenance costs are something that you expect and can foresee—budget your money in such a way that you allocate for these.

Building an emergency isn’t as easy as it sounds. But it’s definitely doable, as long as you have the willpower and discipline when it comes to managing your money.