Emergencies can happen to anyone. Which is why creating an emergency fund is extremely important. Start by creating an overview of your monthly income and costs. This will highlight expenses that can be reduced. Then, with a few tips and a little bit of discipline, you can make sure you are financially covered, even in an emergency.
Having a financial buffer is particularly important in situations that lead to extra, unexpected expenses that cannot be covered by your regular monthly income. You might need to replace an expensive appliance or pay off unexpected debts, such as back payments for taxes. But you also need financial flexibility if you want to change careers and have less income available in the beginning stages, or when you are in the process of moving and want to pay rent on both properties for a short time to ease the transition. In these cases, having an emergency fund is essential. The amount of money you need in the fund will depend largely on your financial situation, but also on your own need for security. As a general rule, you should have access to at least three months’ salary in your emergency fund.
A budget is a useful tool
It can be very difficult to put aside significant amounts of money on a regular basis. It might help to keep a budget for a month or two in order to create a comprehensive overview of your income and expenses. The positive side effect of keeping a record of everything you earn and spend over a period of time is that you will start to see where your money goes and understand where there is room for savings in your budget.
Save one fifth of your salary
It’s also easier to save if you add some structure to your finances. Have you heard of the 50-30-20 rule? The rule divides your net income into three different categories: 50 percent of your net income, the first category, is used to pay for fixed costs. This includes recurring expenses such as rent, electricity, phone or insurance contracts, but also the cost of food.
30 percent of your income is put into the second category, and used to finance the things you do in your free time. This includes spending on hobbies, streaming service subscriptions, savings for holidays or buying any non-food items. You have more control over money spent from this portion of your income than you do over your fixed costs. If, for example, your fixed costs come to more than half your net income in a particular month, you can reduce some of the spending in this category to cover your fixed costs.
The third category is made up of 20 percent or one fifth of your net income. This amount should be used each month to add to your emergency fund. The easiest way to do this is to automate the process with a standing order to transfer money from your regular account into a savings account.
Of course, not everyone is in a situation that makes using this rule practical. However, it provides an example of how you can adjust your expenses to match your financial situation. Rules such as this one have the positive effect of helping you to better understand where your money is going, which can also help you make more informed decisions. If you are always keeping an eye on how much money you have left in each category, it will be easier to avoid unnecessary spending.
Make use of bonuses
Bonuses are also a great way to work towards saving up an emergency fund. Any extra money you receive from your employer, whether as a bonus, reward or other payment, can be used to build up emergency savings. In addition, if you receive a raise you can continue to budget for your previous salary and use the difference to add to your emergency fund.
Of course you can keep your emergency fund in your regular bank account. But it makes more sense to keep it apart from the rest of your money in a separate account, preferably a savings account. This allows you to access the money when you need it, profit from better interest rates and resist the temptation to use the money even when there is no emergency. Make saving easier by setting up a standing order to transfer money from your regular account into your savings account.
