***Disclaimer: I am not a financial adviser! I am a normal person who had debt, struggled to pay it off and have been becoming more and more financially literate because of it. I am telling you what finally worked for me from my experience. Always do your own research to make your own decision that’s best for you.***
Building an emergency fund is actually super important. Having a financial cushion available to help you in your time of need will give you a feeling of relief and mental ease when you need it most.
We all have trials and tribulations, and at some point an unexpected emergency situation will arise, whether it may be sudden job loss, an illness, your vehicle needing an expensive part or even a major appliance breaking.
Something will happen, so it’s best to be as prepared as possible!
The notion of building an emergency fund is simple. However, it does require discipline and consistency to make it happen. But, you can do it!
A classic mistake I made was thinking I could save my emergency fund at the same bank I used for all my normal everyday banking…..wrong!
The big problem with that is when your paycheck evaporates and you have no money left, you will naturally dip into the money you’re supposed to be saving for your emergency fund, especially if you don’t have any other money to use and your salary is small.
You’ll need to decide how many months worth of your monthly earnings you’ll want to save. Typically people save 3 to 6 months worth of of their earnings.
Step 1) Decide how many months worth of your salary you think you will need in the event of an emergency
Step 2) Calculate how much money you will need to save to equal 3 – 6 months worth of your earnings (example: $6,000 – $10,000 at least). Now, figure out how much money you will save each payday. Think of a dollar amount you can dedicate to putting into your emergency fund bi-weekly (or whenever you get paid).
Tip: Take your emergency fund savings goal and divide it by the dollar amount you want to save each payday. This is handy if you want to know how long it will take you to reach your emergency fund goal and then you can adjust the amount you want to save accordingly.
Step 3) Open a new savings account at a different bank to deposit your savings into (ideally, your emergency fund should be out of sight and therefore out of mind)
Step 4) Set up an automatic transfer of the specific amount of money you decided upon to be deposited into your bank account dedicated to your emergency fund. Make the process easier for yourself via automation.
Step 5) Sit back and watch your emergency fund blossom like a beautiful garden!
Hot Tip: No matter where you live in the world, do your research to find out what interest rates banks are offering with their savings account products (if you live in Canada, you can also use a TFSA to save your money instead, if you wish).
Ensure you are looking at the normal rate banks are offering, NOT a promotional rate that is temporary and is being used to gain your business.
Typically, brick and mortar banks offer THE WORST interest rates on their savings account products (usually something gross like 0.10%). Internet banks usually offer better interest rates, but not all of them do, so you still need to do your research as per wherever you live in the world to find the best fit for you.
The reason why interest rates matter so much is so that your money can be working for you, rather than just sitting in your bank account depreciating everyday due to inflation. At least, with an interest rate between 1.50% and 2.30% (the latter interest rate is most ideal), it will help to mitigate the impact of inflation on your emergency fund (same with any other money you may be saving that’s just normal savings).
Please note: I’m fully aware that everyone has different life circumstances and not everyone can save an emergency fund – especially since Covid-19 hit last year. Do what you can do. Having an emergency fund is extremely helpful to have. Aim to build one at some point if you’re not able to do that at this particular time 🙂 It took me a long time to build one successfully.
I hope you gained some golden nuggets from this blog post and that it points you in the right direction to be getting more bang for your buck while building your emergency fund.
Leave a comment below letting me know if this info was helpful to you or let me know what you did to build your emergency fund.
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Love & Light! 🙂