Do you want to start building an emergency budget? That’s a great financial goal to set for yourself. Before you do anything, read this list of emergency fund tips first. They’ll help you get started.
1. Budget for It
How much can you afford to set aside in an emergency fund every month? The best way to find out is to investigate your personal budget. Check to see how this new category fits in with your other expenses. You might have to adjust some of the less important categories (for example, entertainment) to make room for it.
What if you don’t follow a budget? You’ll have to fix that mistake immediately. Download one of the most popular budgeting apps on your smartphone and make the financial guideline right away.
2. Automate Your Budget Contributions
Your emergency fund won’t grow very quickly if you’re inconsistent with your contributions. The growth will be sporadic and slow.
How can you speed it up? Make sure that you contribute regularly. Do this by automating money transfers between your checking account and savings account on a monthly or bi-weekly basis. Treat it like paying a bill. The only difference is that instead of paying a business, you’re paying yourself.
3. Keep It Liquid
Your emergency fund needs to be liquid. It can’t exist in the form of investments that have to be sold, traded or closed in order to make a withdrawal. Cashing out an investment isn’t an instantaneous process. It takes time and effort and plenty of paperwork.
In an emergency, you’ll want to be able to access your savings immediately. So, you should keep your emergency fund liquid inside an easily accessible savings account.
4. Use Interest
Your emergency fund will mostly grow because of the contributions that you add to it. But it can also grow a little bit more with the help of compounding interest. Compounding interest will help your balance grow automatically as long as the account remains active.
How can you do this? Instead of keeping your emergency fund in a basic savings account, move it into a savings account with a higher interest rate. A basic savings account will offer a minimal amount of interest—it’s so low that you will barely notice any returns by the end of the year. On the other hand, both high-yield savings accounts and money market accounts offer annual percentage yields(APYs) that you will take notice of. These accounts typically come with APYs between 2-5%.
5. Don’t Touch It
Your emergency fund is for emergency expenses only. It’s not for any other type of expense. So, if you’re not in the midst of handling an emergency, don’t use it. Making unnecessary withdrawals from the fund will dwindle the savings inside and give you a smaller safety net to depend on when you really need it. Leave it alone and let it grow.
6. Have Backup Plans Available
Your emergency fund won’t be very useful when you first start it. Unless you make a large initial deposit, you’re not likely to have enough savings to cover an emergency expense for a few months after opening the fund.
In that short period of time, you will be vulnerable to surprise expenses. To protect yourself, you should have some backup plans for handling these stressful situations. You might be able to use one of your credit cards to cover a surprise expense and then slowly pay down the balance afterward. If you can’t do that, you could try to apply for an online loan. Visit CreditFresh to learn more about different types of online loans, like direct deposit loans and lines of credit. The information could come in handy in an emergency.
An emergency fund can be a lifesaver. You don’t want to be without one in a tough situation. So, follow these tips and start building one!