How to Build an Emergency Fund From Scratch?

An emergency fund is a financial precautionary measure that protects you from unexpected financial crises. It is very important in today’s life, as you don’t know when an emergency arises and you need some emergency funds to tackle the situation of financial difficulties in those difficult times. These funds are meant only for emergency situations and should not be used for day-to-day expenses. Emergencies come in various forms such as medical emergencies, unemployment emergency or damage to personal property.

What is an emergency fund?

An emergency fund is a fund that is specifically saved for unforeseen times of financial issues. When you keep aside some liquid funds for financial crises, it is called an emergency fund. It should always be available and ready to use in an emergency. Emergencies may consist of being laid off, getting sick, needing significant property repairs, or facing an economic crisis due to any reason. The ideal size of an emergency fund varies which depends upon factors like lifestyle, standard of living, family circumstances, and debts. It is important how much money you can comfortably save, but it is more important that the savings should be consistent. If you don’t have any emergency funds, you will have to start with scratch. These funds are typically liquid assets, such as overnight liquid mutual funds, savings accounts, or investments in stock market instruments. The main goal of these funds should be safety and liquidity rather than wealth appreciation.

Importance of emergency funds.

Life is filled with unexpected incidents and emergency situations that may arise anytime in life when we are least prepared to face such emergency situations. To come out of such a crisis, you must take financial safety measures, which are extremely beneficial. These situations include unexpected medical expenses, house repairs, or job loss. These are the situations where establishing an emergency fund becomes necessary. Having an emergency fund is crucial for these three main reasons:

1. Provides Financial Stability: Having an emergency fund makes you confident about financial security, which offers a safety shield during challenging situations. It enables you to face financial emergencies of unexpected costs without turning to loans with high interest rates. Having a financial safety feeling provides a sense of calmness and lessens anxiety.
2. Prevents from loan and debt: In times of crisis, numerous individuals rely on credit cards or loans to meet their urgent expenses. But we all know that depending on loans can result in prolonged money difficulties. By having an emergency fund, you can prevent the need to borrow money and pay interest, which makes you sure about your financial stability and security.
3. Fast recovery in times of emergency: In emergency times, mostly you need immediate response. Having an emergency fund allows you to quickly handle unforeseen costs, whether it is for medical reasons or fixing other financial issues in your home. Having access to funds enables you to come out of emergency situations quickly, and you can get back to your regular routine with minimal interruptions.

When should the emergency fund be used? 

You should set some criteria for determining when an emergency should be used or which type of unexpected cost should be covered with emergency funds. Because not all types of sudden expenses are urgently required to be settled with the help of emergency funds. They can be settled steadily. If you need to visit the doctor and you find that your health care cost is not covered under your insurance, you can use this fund. Emergency funds can stop you from going ahead to credit or loans in times of financial emergencies. If you use a credit card or borrow money to settle the financial crisis, your expenses could increase due to interest and fees.

The process of making emergency funds.

There are various methods and steps to initiate your savings for creating your emergency funds. The methods are, as having a small saving habit or receiving any sudden income. You may find it beneficial to utilise all of these techniques, but if you find that your saving capacity is limited, you should follow the technique of setting aside a portion of your tax refund, which is the simplest way to begin. The process of creating emergency funds is as follows:

• Set a fixed amount’s goal for each salary day: Setting a clear goal for your savings will always keep you inspired. This is the first step in starting to create your emergency fund. Set a goal for every salary day, which should be small but regular. Setting up your emergency fund deduction goal should be realistic and keep you focused, particularly when you’re just beginning. You should start with small savings.
• Establishing an achievable objective: Set an objective of reaching slowly and gradually to a minimum of three to six months’ living expenses. Even though it may appear quite difficult, always keep in mind that each tiny contribution will be helpful in reaching your goal. When you start saving, you should also determine the time needed to achieve your goal, which should depend on the amount and frequency of your savings contributions.
• Make a Budget: When you are planning on creating an emergency fund, you should monitor your earnings and spending to find places where you can reduce costs to increase your savings. Make a monthly budget with a specific allocation of funds for different homely expenditures as well as for your emergency savings. Follow strictly to your budget and make saving for unexpected events, which should be your top priority.
• Develop a habit for saving: 
  It becomes easy to grow your savings for emergency funds if you have a habit of regularly setting aside money for the same. It is one of the quickest methods to achieve your goal of creating emergency funds. If you have the habit of saving money, it will always be the best thing to create your emergency funds. Never go beyond the limit while using your credit cards.
• Begin with modest and regular contributions. In the beginning, you can start with a very small amount. But you are needed to be consistent in creating the emergency funds. Consistency is very important. You should regularly add to your account, even if it is just a small amount. As time passes, you will notice a gradual increase in your emergency fund.
• Keep track of how you are advancing: When you are progressing gradually towards your goal, make sure to frequently monitor your savings. Keeping track of your finances, whether it’s through automatic alerts or manually recording your expenses, provides a sense of satisfaction and motivation to go ahead.
• Develop a systematic and regular savings: There are various methods to save money, and one of the simplest ways is to adopt the method of keeping aside a predecided sum of money daily, weekly, or at each salary day. Be strict to reach a particular amount and, if possible, gradually increase it to speed up the growth of your savings.
• The process of automated transfer of funds: Use the method of savings that is very easy and common. It is called an automated transfer from your primary account to a designated savings account for emergency savings. In this method, some of your earnings will be deposited in a separate account from your salary account before you start to use it.
• Handle your cash flow efficiently. The saving in your emergency funds account depends on the schedule of when your salary is coming into your account and when you start spending. If your timing is incorrect and the date of your money transfer from your account for emergency funds does not match with your salary receiving date, you can be facing a shortage of funds by then, and it will be difficult to deposit funds in your emergency funds account. But by monitoring it closely, you can modify the date of fund transfer so that there is no issue in transferring the amount.
• Catch the opportunity of receiving sudden income: There can be some occasions during the year where you receive a sudden increase in funds. A tax refund can be one of the opportunities. Sometime some bonuses or arrears are provided to employees. Some part of that income can be deposited in an emergency funds account.
• Acknowledge your accomplishments. Always try to acknowledge your achievements. If you accomplish your goal of emergency fund savings, you can celebrate the opportunity, which will motivate you to save money with more efficiency. You can set a new goal further.
• Prevent temptation: You should be dedicated to your emergency savings. You should avoid using it for non-urgent costs. Always remember that the fund is only for emergency situations and cannot be used for any other type of requirement. Its existence gives you peace of mind. In case you use the money for an emergency situation, always remember to replace it quickly with a new one.

Wrapping up.

Creating a safety net is very essential these days, as today’s life is full of uncertainties. If you want to attain financial security and peace of mind, always have an emergency fund. Begin to create an emergency funds account and set an objective that can be achieved within a fixed time limit. It needs developing a financial plan and setting up automatic savings. Stay committed to your contributions, no matter how minor they are, as we all know each drop of water is used to fill a vessel. Having a backup fund is a great help for you to deal with surprise costs and prevents you from going for debt.

FAQs.