How to Create an Emergency Fund

The journey to personal financial stability and prosperity is long and requires persistent efforts.

So if you dream of becoming rich and wealthy, you invariably require doing proper personal financial management.

It’s good to know this, but the most important question still remains, and that is how you would begin this journey of personal financial management.

Well, you may say that the foremost thing that you would do is to begin saving money.

This may be true to some degree, but this does not give you the whole picture.

So what’s the first step you should take to build your personal financial management?

The answer is, “Emergency Fund”.

Yes, if you really desire and want to achieve personal financial security and stability, you ought to begin by creating an Emergency Fund.

How to Create an Emergency Fund

In fact, having an Emergency Fund is really critical.

The word itself is self explanatory.

So, an Emergency Fund is the fund that you build for meeting any kind of financial emergencies that require money. It may happen that you are out of job, have suffered a business set back, or may be seriously ill, or hospitalized. Each of these situations requires money immediately and that too in big number.

Then, how would you be able to meet such situations?

It is the Emergency Fund that can be your savior.

Let me make it clear for you.

Basically, there are two reasons for which you save money.

One is for fulfilling your dreams and aspirations, and the other not so good but equally important is for meeting any sort of Emergency situation in your life. It has been seen that a lot of people do realize that money saving is important if they want to fulfill their dreams and aspirations but fail to keep an Emergency Fund.

Here, one thing is to be kept in mind.

If you are not able to survive from an Emergency situation, how would you be able to fulfill your dreams and aspirations?

Or is it that you would use the fund which you have saved for fulfilling your dreams and aspirations in meeting an Emergency situation?

Well, you have to understand that you ought to have an Emergency Fund with you so that money is not the problem with you when you face an Emergency situation.

So if you are thinking How to Create an Emergency Fund, then let me assure you that it is very much possible to create an Emergency Fund, and it just requires your dedication and the will to have an Emergency Fund. You need not do big things. Little, but steady steps towards building an Emergency Fund are enough to have the corpus or fund with you that you may need in order to meet an Emergency situation in life.

So here are the things you can do to create an Emergency Fund.

Know your monthly expenses and income resources:

Building an Emergency Fund, starts with this very step. You have to know your monthly expenses and your income streams. So start calculating what your monthly expenses are. Make a list of all the regular monthly expenses so that you can exactly know how much you can save in a month, and particularly what should be your Emergency Fund. Ideally an Emergency Fund should be equal to six months of your monthly income. However, you can reduce or raise this limit depending upon your risk bearing capability.

Start Small:

This is perhaps the key to building up your Emergency Fund. No need to worry if you are not able to save much in your Emergency Fund. You can even begin by saving $1 per day. The point is just start saving for your Emergency Fund. The saving spree will itself motivate you to increase your saving efforts when you see money growing in your Emergency Fund. When you start small you have no specific amount in your mind. So you have no burden and pressure for saving money for your Emergency Fund. With every dollar saved for your Emergency Fund, you would near your goal of having an adequate Emergency Fund with you.

Opt for Automatic Deduction:

There may be one or other reason due to which you are not able to save money for your Emergency Fund. It is usually seen that conscious saving efforts can turn out to be difficult for the ones who have just started to save money. So, if you too are suffering from the same problem and find it difficult to save money for your Emergency Fund, then you can go for automatic deduction. For this, you can open up an online savings account and instruct your bank to automatically deduct a fixed amount (as chosen by you) each payday.

Treat Emergency Fund as a Bill:

After having realized the importance of Emergency Fund, still you may be irregular in your savings towards Emergency Fund. One of the effective ways is to treat your Emergency Fund as a Bill. As you pay your utility bills each month, set a predetermined value for your Emergency Fund and allocate that money towards it as soon as you get your paycheck. This way you would become regular in your saving towards your Emergency Bill.

Reduce Your Expenses:

Well, this is the most common technique of increasing your savings towards your Emergency Fund. There are several such categories in which you can reduce your expenses. Suppose, for example, if you have made ten expense categories and you reduce your expense in each of the categories by ten dollars, so you end up saving hundred dollars in a month. And this is a good figure indeed. Saving money can be initially difficult, but as you begin and continue your saving efforts, you would definitely be motivated to save more money for your Emergency Fund.

Reward Yourself:

Saving Money and particularly for Emergency Fund is a challenging task. You have your expenses and have set aside your saving targets, as well. So making provision and actually saving money for Emergency Funds is a daunting task and requires dedication, and persistent efforts. If you are successful in saving money towards your Emergency Fund month on month, then preferably you should reward yourself. Reward should be in monetary terms that you should put in your Emergency Fund’s Account. This reward can be as low as $10 or can be high as $100. It all depends upon how much you want to reward yourself.

Save the Difference You Spend on Groceries:

Well this may not be a very popular technique of building an Emergency Fund, but surely an effective one. Let me take an example to explain this technique to you. Suppose you spend $ 230 to $275 on groceries. So, allocate a budget of $300 on groceries, and whatever amount you are left after spending on groceries, put that amount in savings towards creating an Emergency Fund. This way you can quickly build up your Emergency Fund.

Quit your unhealthy Habits:

Habits are good, and habits can also be bad. Well, certain habits are unhealthy which you should be avoided at all costs. It can be smoking, or it can also be drinking. In doing so, you not only safe guard your health but can also save money. So you should quit your unhealthy so as to save money for Emergency Fund.

Limit Your Access:
Another way in which you can safeguard and build your Emergency Fund is to limit your access to it. So you can have money market instruments, online savings account, Certificate of Deposits, Treasury Bonds, or purchase some other instruments so that you can limit your access to your Emergency Fund. This will enable you to save and grow your Emergency Fund which otherwise you would have spent in one way or the other.

Save Your Coins:

Savings your coins can help in building your Emergency Fund. So you should not spend your coins and rather than accumulate the coins. At the end of the month deposit your (coins) savings in your Emergency Fund account.

Reduce on Your Fun Money Expenditure:

Fun Money is a major source of expenditure month on month. However, with little efforts you can reduce the amount you spent as Fun Money on dining out, watching movies, etc. Instead, you can choose to watch a movie at home on your Home Theater, or can cook tasty and healthy food in your home. This way you can reduce your expense on Fun Money and so can increase your savings for Emergency Fund.

Conclusion

So you see that creating an Emergency Fund is not difficult at all. It just requires your motivation, dedication and persistent efforts. Having the cushion of Emergency Fund, you can easily overcome any sort of emergency situation in your life. It is often said that, ‘Precaution is better than Cure’. Likewise, it is always better to have Emergency Fund with you so that money is never a problem for you. Although I have listed down many ways of How to Create an Emergency Fund, however, these are not exhaustive in any way. You can include many other techniques of building an Emergency Fund. The essential thing is to start your journey of building your Emergency Fund.

Scroll to Top