How to Start an Emergency Fund to Prevent a Financial Disaster
Most people save money with their family’s financial future in mind. If you’re planning to buy a house, save for retirement or pay your kids’ college fee, putting away a little money every month is a great way to minimize stress and avoid loans – but what if you suddenly lose you job or run into an unexpected financial disaster? That’s when an emergency fund comes in handy.
What is an Emergency Fund?
Imagine getting a fat bonus of $5000 from your job. What is your first instinct for spending the money? A shopping spree? A trip to Paris? How about putting the money aside for a rainy day instead, in case you run into a huge financial problem tomorrow and need funds immediately to recover from the unfortunate stitch. Aside from your normal savings fund meant for future spending, you may also need an emergency fund to deal with any unplanned situations.
These saving accounts usually serve the purpose of a financial buffer in worst-case-scenarios for an easy, quick access to your savings without having to get in debt. These liquid funds are great for paying large, sudden expenses or medical bills and work as a financial cushion in case you lose your current job and need to pay for basic necessities while you find work. In the current economy, emergency funds are becoming more and more necessary to avoid high-interest personal loans and now you can make one too.
How Much Money Do You Need for the Fund?
You probably have other financial obligations to meet such as paying off student loan, applying for mortgage or fast-tracking payments for your credit card debt, but its advisable to put saving for an emergency fund on the front line in your list of financial goals. Why? Because if you’re already in debt, a sudden financial emergency can plunge you deeper in loans and make it harder to recover – but if you already have an emergency fund in place, you have a small financial cushion to fall back on in a time of crisis.
If you’ve just started your emergency fund and don’t have a lot of spare cash to stash away into your saving account, you may want to start with whatever contributions you can make – whether it’s $20 or $100 a month. Your main goal should be to have at least 2 to 3 months’ worth of your current income in the account – of course the more you save, the better prepared you are to face any financial disasters or emergencies that may occur in the future.
How to start an emergency fund
Set up a savings account that is separate from all your other bank accounts so that you don’t feel the frequent temptation to dip into your savings and use the emergency funds for other purposes. If you’re planning to make smaller contributions to your account, you may want to opt for a tax-free savings account (TFSA) but keep in mind that you TFSA has a contribution limit of $5,500 per year.
Once your emergency account is in place it’s time to start filling it up until there until the savings equal at least three months of your income. If you want a more accurate estimate of how much money will be enough to cover your expenses in case of an emergency, use one of the free online emergency fund calculators to reach your goal more easily. Try to be consistent with the contributions and set a feasible deadline to meet your financial goal.
Once you’ve given yourself a timeframe for reaching the three-month income mark, calculate how much money you will need to contribute each month to meet the goal in time. If your monthly income equals $2000 and you need to meet the $6000 mark in one year, your monthly contribution will come out to be $500. Any bonus or tax return money can also go into your emergency fund so that you reach your goal faster.
More in Pocket Change
‘Captain Marvel’ Star Brie Larson Just Went On a Real Estate Shopping Spree & These Are The Stunning Properties She Got
Being on the Marvel bankroll is a lucrative job and award-winning actress Brie Larson is proof of it. The 30-year-old has...December 26, 2019
This Is The One Trait That Bad Bosses Have, According to Thousands of Employees Who Have Dealt With One
Thousands of European workers have said their piece and this is what they have to say about the qualities bad bosses...December 25, 2019
You’ll Be Inspired After Reading Former NBA Player Junior Bridgeman’s Expectation-Defying Success Story
It’s a sad reality than a reported 60% of NBA players eventually go broke after about five years into their retirement...December 24, 2019
These Millionaires Refuse to Spend Their Money on These Items & Maybe You Should Too
Contrary to what most people might believe, not all millionaires spend indiscriminately on themselves. Some prefer to put their money on...December 23, 2019
Want to Advance Your Career? Avoid Turning Into These Negative Workplace Personalities at All Costs
One’s professional personality can make or break their career. Now, more than ever, workplaces are beginning to focus on creating positive...December 20, 2019
Want to Keep Your Creative & Analytical Skills Sharp For Work? Take On These Interesting Hobbies On Your Free Time
Self-improvement should be a lifelong practice, especially for people who want to advance their professional career. Doing so would help an...December 19, 2019
Your Profession May Have More Weight On The Car Insurance Rates You’re Granted With Than You Initially Thought
When assessing their applicants, car insurance providers create accurate profiles of individuals considering factors like their age, credit score, marital status,...December 18, 2019
You Won’t Believe How Much These Actors, Who Played Professors in the Harry Potter Movies, Are Worth
Young and old, everyone was captivated by the Harry Potter franchise – and who wouldn’t be? Die-hard fans carefully followed the...December 16, 2019
Experts’ Tips on Creating a Budget to Become Financially Successful
Have you ever been a one-day millionaire? After getting your monthly salary, you feel so rich that you eat at a...December 13, 2019