It is an ordinary morning of an ordinary day. You get out of bed, get in the car to go to work and, to your surprise, it won’t start. You take it to the workshop and the mechanic informs you that the repair will cost around 3,000 dollars. Thus, without anesthesia. Could you face that payment without leaving your family finances in diapers? Do you have an emergency fund?
An emergency fund is a savings cushion that allows you to solve any financial unforeseen that may arise in your day to day life, such as that car breakdown or the emergency replacement of the refrigerator because it stops working. In this article we will explain step by step how to create it without dying trying.
Creating an emergency fund in 5 steps Realize that you really need it.
To create an emergency fund you will have to work hard and make some sacrifices. You will not succeed if you do not stop to think, reflect and become aware of how important it is to create this economic reserve that in the future will prevent you from going into debt when unexpected expenses arise.
Decide its amount.
There is no one exact figure valid for everyone. Ideally, the emergency fund should be as large as possible, but without going overboard. Remember that money that you do not invest will lose purchasing power due to inflation. However, the objective of this fund is not profitability, but liquidity.
Our advice is that you add your monthly expenses, add 20% and multiply it by six. For example, if you spend 1000 dollars every month, then:
1000 x 1.2 = 1,200 x 6 = 7,200 dollars
That should be the amount of your emergency fund.
Establish a monthly savings percentage.
You already have a goal and you know the exact amount of money you must save to create your emergency fund. The next step is to establish a plan to achieve it. Depending on your income and expenses, you must choose a monthly savings percentage that you will allocate exclusively for this purpose.
You can start with a percentage that you feel comfortable with and gradually increase it. For example, 5% the first two months, 10% the next three, 15% later … Ideally, the savings rate should be close to 25% and never be less than 10%.
Automate savings.
The money you save each month cannot stay in your regular checking account. If you do this, it will be mixed with the rest of your income and expenses, you will lose its control and end up using it. You know it and we know it.
Talk to your bank, ask them to create a savings account for you and that the first days of each month, after receiving the income from your payroll, order a transfer for the amount you have decided from your checking account to your new savings account . This point is the most important of all: you must automate savings at the beginning of the month.
As you can imagine, the savings account will be the place where you will keep your emergency fund. You should not have any debit or credit card on this account to avoid the temptation to use it.
Make extra income.
The plan to create your emergency fund is already underway. It is only a matter of time before you get it. But if you want to speed up the process you can make extra income. For example, 50% of your extraordinary pay or the bonus for work productivity.
You can also try to save a little extra money each month by reducing the most absurd expenses or generating some extra income. Here we show you three very original methods that can help you achieve it.
