Having a buffer to rely on whenever disaster strikes is always a good idea. You can never be too prepared, and that is true in a financial sense. Whenever something unexpected happens, we should always have something to rely on so that we won’t get washed away. An emergency fund would protect us from such things, and they keep us afloat from disasters and calamities. However, emergency funds could get as wide and deep as any other topic if you look at it with a keen eye.
How much should you save? What portion of your income should you save? Are emergency funds better than insurance? What’s the difference between the two? There are a lot of questions that arise once you take a closer look at the thing.
Let’s zoom out for a bit. Business companies, individuals making a daily wage, and CEOs alike are all prone to disasters. They all have to find a way to make a buffer between loads of debt and being okay after a certain emergency. There are also multiple ways to do this. Whether that’s utilizing advantageous accounts and looking up CIT Bank CD rates or simply saving inside a piggy bank, there are multiple approaches to an emergency fund. Nonetheless, let’s talk about emergency funds and what is the right way to approach them.
What are emergency funds?
You could think of an emergency fund as a savings account that has been made specifically for unexpected events such as natural calamities or disasters. You save money for expenses that are not usually expected on a daily basis. This covers a lot of things: hospital bills, job layoffs, or even your car damages in the event that you get into an accident. This is important because you wouldn’t want to rely on loans and credit cards when the time comes. Relying on such methods leads you to accrue debt and credit, which isn’t good for you in the long run. The general buffer range for emergency funds can be from three to six months’ worth of your monthly expenses.
What are some tips to keep in mind when making an emergency fund?
An emergency fund may be as simple as saving up to three to six months’ worth of your monthly expenses, but there are a lot of factors that come into play. Just how much of your salary or income should you deduct on a monthly basis? On what type of savings account should you save your emergency funds? There are a lot of things that you need to keep in mind, and here are some of them.
- Don’t overdo it. Building an emergency fund should start with something small. Starting an emergency fund may be very overwhelming when you’re doing it without any experience or savings in hand, so try not to overdo it in the first few months. The way to do this is by setting a manageable goal. Look at your monthly expenses and monthly income. Try to deduct a small amount that wouldn’t hurt your lifestyle too much, and make that your emergency fund. The longer you do it, you’ll probably get comfortable with the act. From then on, you could start to incrementally increase the budget you set aside for emergency funds.
- Set goals. As with everything, having a goal makes it easier to visualize your path. You won’t be saving blindly, and you’ll be able to have a sense of completion whenever you actually reach your goal. This makes it rewarding while also structured as you save along the way.
- Make it automatic. There are multiple ways to automate your savings. You could have a monthly deductible from your income that goes directly into your emergency fund or have somebody do it for you every time. That way, you wouldn’t be drowned with reminders and other things while you also gain peace of mind.
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