Having a cash cushion in case of financial hardship is not just convenient — it’s a necessity nowadays. Between inflation raising the prices of consumer goods and the pandemic still impacting your finances, your budget might be stretched thin. Even a small, unexpected expense could make it snap.
A well-stocked emergency fund can prevent that from happening, but it isn’t always easy understanding how to build one. To help clear up some of the confusion, check out this guide. Here are six golden rules of your emergency fund.
1. Set an Appropriate Goal
An emergency fund should contain three to six months of living expenses. This sizeable amount is large enough to handle multiple unexpected expenses, like car trouble, doctor’s fees, or a household repair. It’s also a big enough cushion to cover your monthly expenses if you get sick or laid off for up to six months.
That said, six months of living expenses is a daunting goal. When you’re first getting started, scale down to think about how you’ll save your first $1,000. Breaking down your emergency fund into smaller steps can help you focus on achievable goals.
2. Make Consistent Contributions
No emergency fund grows overnight — whether you’re saving up your first $1,000 or the full six months’ worth. Most people need time to build up savings.
Consistency will help you keep on track, so treat your emergency fund like any other bill. Pay it on time without fail every month.
You May Like to Read: How to Protect Your Savings Against Inflation?
3. Don’t Panic if it Falls Short
Bad luck can happen to anyone, at any time. Sometimes, you’ll have to repair your furnace before you’ve squirreled away enough in savings.
It’s easy to panic in an emergency without your emergency fund but try to stay calm. Other safety nets may help you in these situations, including personal short-term loans, credit cards, and lines of credit.
You can learn more about some of these options by visiting the financial institution MoneyKey. After reading about personal loans through MoneyKey, you’ll be more informed about whether a line of credit or installment loan is a better option for your finances.
4. Don’t Touch it Except in Emergencies
In between emergencies, your savings account can seem like a massive pile of cash that’s just going to waste. But don’t let that convince you to tap into it when you want to splurge on a new phone or go on vacation. These unnecessary withdrawals will weaken your emergency fund’s powers. Do it too often and it might not even help you pay off the next unexpected expense.
5. Put it in a High-Yield Account
Interest is not just something that applies to short term personal loans. It also accrues on savings you keep with a bank. While a basic savings account earns a measly 0.06% Annual Percent Yield (APY), some high-yield accounts can earn as much as 3%.
Depending on your luck, you may go months (or even years) in between emergencies. You can capitalize on that time by putting your savings into a high-yield account to earn even more interest.
6. Never Lock it into the Market
In the hunt for the best APY possible, you might be drawn to bonds, stocks, and other investments. But even Bloomberg says never to invest your emergency fund. Doing so can lock away your money for specific terms, making it unavailable when unexpected expenses come along.
Follow These Rules for Success
Building up an emergency fund can be challenging nowadays, but the task is a lot easier when you follow these golden rules.