The Ultimate Guide to Creating an Emergency Cash Fund

Life is expensive.

First, you need to get a job or start a profitable business to secure monetary income.

Then you need to spend that income on rent or a mortgage to ensure you have shelter.

And, of course, you need to buy food to make sure you don’t go hungry.

But what if you get sick? Well, you better spend some of your monthly earnings on health insurance.

Oh, you need to be able to get to and from your job in order to continue earning money, too.

If you choose not to use public transportation, you’ll need a bicycle or an automobile (which also costs money).

Then you’ll need to spend your hard earned dollars on insurance, gas, routine maintenance, etc.

So what’s left? In the event of an emergency, there might not be much of anything left if you haven’t set aside a cache of emergency cash to help get you by.

In this post, we’ll discuss the importance of having emergency funds available in the event of an emergency, as well as how to go about creating an emergency cash fund.

Reasons to Build Your Emergency Fund

Why should you set aside a portion of your earnings for unforeseen events and emergencies?

Because money doesn’t grow on trees, and financial emergencies can happen anywhere and anytime.

Even for people who are otherwise financially responsible and thrifty, a sudden financial emergency can push them into poverty.

Whether the unforeseen circumstance comes in the form of a car accident, health crisis, or something else entirely, having emergency cash set aside will help protect you (as well as your investments).

An emergency cash supply is like having a savings account. But instead of making a withdrawal once a goal is reached, the emergency fund is left untouched.

Emergency funds are ONLY for unexpected circumstances.

Furthermore, having an emergency fund will ensure you don’t get penalized for taking an early withdraw from accounts such as your superannuation or federal pension funds.

Additionally, having an emergency cash fund ensures you won’t have to sell long-term investments such as stocks and bonds at below their value.

An emergency fund should allow you to cover basic monthly expenses in the event that all other income is unavailable.

Doing so will provide you and your loved ones with a financial safety net that offers protection from events like a layoff or medical emergency.

How to Save for Emergencies

Saving up money for the unexpected doesn’t have to be difficult.

A person simply needs to be diligent about putting away their earnings and keeping this fund separate from other savings accounts.

For example, it’s recommended that half of your income should be devoted to your regular and essential expenses. Meanwhile, about a third should go towards savings. The remainder should be reserved for

Meanwhile, about a third should go towards savings. The remainder should be reserved for enhancing your quality of life.

It’s important to note here that of the part of your income which you are putting away into savings, part of that sum includes creating your emergency cash fund.

Some experts will even argue that you should create your emergency fund before you even begin putting money away in other savings plans such as for retirement.

Doing so will help ensure your financial situation is secure enough to protect yourself against unforeseen events which only hinder your savings progress.

Especially if an emergency would only result in taking a premature withdrawal from a retirement account.

So how do you go about creating an emergency cash fund? Check out the tips below!

1. Don’t Take on More Debt

First and foremost, avoid taking on more debt.

If you have outstanding debts, pay them off as quickly as possible to avoid paying more than the original balance due to interest.

Without having to pay off debt, you will be better able to build your emergency fund quickly.

Furthermore, avoid taking on any more debt as a means to create your emergency fund.

If you’re a homeowner, DO NOT borrow against your home’s equity.

2. Keep Emergency Cash in a Safe But Easily Accessible Place

Your emergency cash fund doesn’t necessarily need to be kept in a bank, especially if the account is tied up in stock investments.

The funds need to be available immediately in the event of an emergency, so storing it in a hard to get to place (like a retirement savings account) is discouraged.

If you do keep it in the bank, open a basic savings account with little to no withdrawal limits or stipulations.

Remember, though, this account is separate from your other savings accounts.

If you opt to keep your cash with you in your home, take some creative steps to hide it effectively.

Just don’t hide it in your sock drawer or under the mattress!

3. How Much Cash Is Recommended?

So how will you know when you can stop putting money into your emergency cash fund?

To begin, you should set enough aside to cover at least one month’s expenses.

However, as you build your savings your emergency fund should grow to cover a few month’s expenses or even a year.

4. Money Saving Tips

Saving money can be as simple as throwing spare change into a jar for later use.

The trick here is to save your money, not spend it.

When shopping, try carrying only cash, and only bring the amount you plan to spend.

Doing so will help you avoid impulse buys.

Also, if you haven’t already, create a monthly budget. Keep track of your spending and eliminate anything unnecessary.

5. Building Emergency Funds While in Debt

As previously mentioned, avoid taking on new debt as a means to build your emergency fund.

The importance of an emergency fund, however, can’t be downplayed.

If you’re working to reduce the amount of debt you owe but still want to start building your own emergency fund, contact your lenders.

Many creditors are willing to work with your current situation and will offer a repayment plan.

Alternatively, if you’re ready to settle, many creditors are willing to broker a deal when the balance is paid in full.

Furthermore, be mindful of your spending while taking advantage of sales and coupons.

Conclusion

Building yourself an emergency fund isn’t difficult, it just takes time and effort.

In the unfortunate event you need to use it, you’ll be grateful you did.

In the event you never use it, treat yourself to something nice, or invest that money into something else.

Do you have an emergency fund story you’d like to share? Tell us about it in the space below!