If you’re like most people, financial freedom is probably one of your life goals. Who doesn’t want to be free of any financial burden after all? Unfortunately, financial freedom is one tough goal to achieve. If it’s easy, you shouldn’t be in debt but living the good life. The fact that it doesn’t just happen and requires hard work is why working towards financial freedom is worth it in the end.
But where do you start? Some would say to pay off your debt first. Others would recommend investing. I, on one hand, would say save first. Save for an emergency fund to be exact.
Without an emergency fund, you’re only bound to get into more debt. Without an emergency fund, you may end up withdrawing from your investments to take care of emergencies. In the end, you may be in a worse financial situation than before.
Whether you like it or not, an emergency fund is the money saving habit that is imperative to your financial success. Below is a simple guide to starting an emergency fund as soon as you can.
What is an emergency fund?
Before we go to the itty gritty bits of building an emergency fund, let’s first understand what it is exactly. As you’ve probably gleaned from the name, an emergency fund is a type of fund allotted especially for emergencies.
You stash away money so you have something to use in case of emergencies. An emergency fund, therefore, is different from regular savings. It is not to be used as down payment for a new car and other such investments. It is to be set aside so it’s easily accessible in case you lose your job or you’re faced with a major medical expense.
How to start an emergency fund?
If you’re ready to start your journey towards saving for an emergency fund successfully, below are three steps that will keep you on track:
- Set a target
Like with any type of goals, you need a target and you need to be as specific as you can if you want to get it right. In general, emergency funds should equal at least 3 months’ worth of your expenses. You can certainly aim for more but 3 months is the rule of thumb. In case you lose your job, 3 months should be enough time to enable you to get back on your feet financially.
To set your target, start by listing down all your expenses. By all, it means all. Don’t miss anything from rent or mortgage to utility bills, clothing expenses and etc. Total your expenses then multiply by three and you’ve got your emergency fund target.
- Start modestly
If you’re already setting aside a percentage of your income to a regular savings account, it may be difficult to start another account. This is why when saving for an emergency fund you need to start small if you must. Start at a percentage you can comfortably manage and go from there. Some people, for example, start at 5% then they gradually increase the amount over time.
- Automate savings
If you want to make it even easier to save for an emergency fund, you need to automate the process. Set up another account where you transfer a specific percentage of your income first thing to get the matter out of the way. As what experts say, you won’t look for money you do not see. By automating your emergency fund savings, it will be way easier to reach the 3-month target. In no time at all, you’ll be all set even if an emergency strikes.