8 Strategies To Building an Emergency Fund
What if your car broke down today? Or a family member fell ill and suddenly hospital bills are unbearable? Would you be in a position to foot the bills or much less contribute towards a financial solution?
These are all the considerations or scenarios that come into play when one is starting an emergency fund. Setting up an emergency fund is important even if you’re in debt. If you are ever in a fix, emergency funds ensure that you don’t accrue more debt while solving the problems of life. After setting the emergency fund, you can focus on paying the debts. An emergency fund should have three to six months of living expenses in cash and easily accessible ie. not tied in assets, investments or locked accounts.
Here are strategies for building that emergency fund especially if you plan to have a family.
1. Track Your Expenses
You won’t know your monthly expenses unless you have been tracking them. It’s important to know how much you spend on groceries, rent, fuel, entertainment, travel and savings. Create an excel spreadsheet and log in your expenditure for 3 months. This will give you a baseline figure of the amount you need on a monthly basis and finally three months then save with that figure in mind. You can also print out your bank and credit card statements to see how much money you spend in a period of 3 to 6 months.
Unless you budget, again you won’t have a baseline estimate to use as the goal. Create a budget that accounts for the emergency fund. Assign an amount to go towards the fund. No matter how small it is, it will help you create a savings culture.
3. Figure Out How Much You Need To Save in a Month
If your household monthly expenditure is KES 60,000. This means you spend KES 180,000 in 3 months and KES 360,000 in 6 months and either of these can be your baseline figures when setting up the fund.
If you choose to have KES 180,000 in your emergency fund saved in a period of say a year, then your monthly contribution should be KES 15,000.
We all have places where we are known to splash and splurge. It could be eating out a lot, buying clothes, going on vacations or overloading your card with too many paid subscriptions. Choose one area where you can cut down and channel that money to the emergency fund.
Cutting back hurts because and sometimes shocks our lifestyle. If you feel you are unable to cut back alternate between the options you have. You could try and forego eating out this month and opt-out of Netflix next month. It’s all about finding a balance that works for you.
5. Increase Your Income
Increasing your disposable income enough to save means cutting your expenses or increasing your income. In addition, you can make your purchases work for you. We always have a unique set of skills and different perspectives which make us stand out from the rest.
Use these skills to set up a business on the side where you can channel the profits to the emergency fund. There is always the fear that the business will fail but what if it works?
6. Cooking at Home
Instead of going out, make wholemeal dishes at home. Eating out costs more than cooking at home, not to mention the time and resources it takes to go to your restaurant of choice. Grocery shopping is cheaper, healthier and if you buy some foodstuffs in bulk, you’ll end up saving a lot of money in a month.
You don’t have to completely forego eating out, but you can limit it to once a month.
7. Create a Direct Debit Order
If we trusted ourselves to do everything we needed to do, we would never do it. A little push is needed for days when we don’t feel like rising to the occasion. In this regard, talk to your bank to create a direct debit on a fixed date of the month, preferably the day after you receive your salary. Your emergency fund will thank you.
8. If You Have a Spouse/Partner Get Them on Board
I’m not saying that you should have joint bank accounts, but having the same financial goals means more accountability and more success. In addition, your spouse will most likely make better and financial decisions which make your family more financial equipped for any life problem. Agree on an amount to be saved by both of you then set out to do it. It’s never too late to start saving for your future
These ideas may be small but they’re thrifty and help build a saving culture. If implemented in one year, they can snowball your fund to where you want it or way past the set amount. Alternatively, you can schedule an appointment with a bank and they’ll advise you more appropriately based on what you want to do and align it with financial plans.
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