d financial planning is planning for the future, and whatever it may

 

What Is an Emergency Fund?

One pointer to good financial planning is planning for th find e future, and whatever it may bring. Therefore, an essential component of a solid financial plan is an emergency fund.

An emergency fund is used to cover a financial shortfall when an unexpected expense arises. Your emergency fund house can serve as a place to get the money you need when you need to sort something urgently important but you won’t have the financial capability except you d business ip into the funds. Emergency Fund must be reliable, it needs to hold guaranteed investments. 

Ideally, you won’t need to use the money in your emergency fund except in emergencies, and you will most likely maintain it for the long-term. 

You can divide emergency funds into two main categories:

Short Term Emergency funds and Long Term Emergency funds

Your short-term emergency fund is the place you go to when you have an immediate emergency. It should be in an accessible account, which will probably bear little interest. The most important thing to consider is accessibility. The purpose of the short-term emergency fund is for smaller emergencies, like car repairs or replacing a major appliance that has broken. It can also be used as a bridge to get you through the few days until you can access your long-term emergency funds in case of a more extreme situation.

A long-term emergency fund allows you to save for large-scale emergencies, such as job loss or a major natural disaster. 

When you have an emergency fund, your money is on guard, so to speak, just waiting to be called into action. You don’t have to be worried when you have to come up with money you need Even if your emergency fund isn’t big enough to handle everything, it can still help reduce the amount of money you must look for from friends and family.

What Makes for an Emergency?

Funds for your entertainment and leisure does not count as an emergency. A new big screen TV doesn’t qualify as an emergency, even if your old TV breaks down. In order to ensure that your emergency fund is there when you need it, you need to be able to know what a true emergency is. A true emergency is a situation that requires immediate action, and that can affect your long-term well-being or impact the viability of an important asset (such as your home).

How Big Should Your Emergency Fund Be?

Personal finance experts recommended that your emergency fund contain at least six months’ worth of expenses. Yes, building an emergency fund can seem difficult especially during a trying economy. 

To calculate the exact amounts, you need to determine what constitutes six months’ worth of expenses. Simply add up what you spend each month in budget and multiply by six. Or you can review your expense in the past six months of expenditures if you’ve been using personal finance software or a debit or credit card that tracks expenses eg Fundall Lifestyle card.

Building Your Emergency Fund

One thing that discourages when building an emergency fund is the amount of money you must contribute. You don’t have to fund your emergency account all at once. Build it up little by little. Just get started and remain consistent so that over time you can reach your emergency fund goal.

Here are some tips for effectively building your emergency fund:

Break it down. You should decide how much you want to put in your emergency fund and figure out how much you can afford to put each month. Then, determine how long it will take to reach your target based on your monthly contribution. 

Use wasted money. Look for the money holes in your budget, such as over-ordering at restaurants, buying what you don’t need. Use that money to build up your emergency fund.

Make it automatic. Schedule regular payments from your Bank to your emergency fund. This way you don’t have to remember to do it yourself every month.

Use spare change. Have your entire family empty the change from their pockets into a jar at the end of each day. This works well if you use mostly cash. At the end of each month, take the money in the jar and add it to your emergency fund. Use this technique to supplement or boost your emergency fund, but don’t depend on it entirely to get you to your goal. Another way to save spare change is through Fundall. They will round up every purchase you make and save the difference.