One of the main principles of good financial planning is preparing for the future, and whatever it may bring. With this in mind it is essential that your financial plans include an emergency fund.
The idea of an emergency fund is to provide cover if a financial shortfall or emergency crops up. The emergency fund is the place that you can go when you find yourself financially short. As this needs to be reliable it needs to have guaranteed investments, so savings accounts are great for an emergency fund whereas stocks are not.
Your emergency fund should also hold accessible investments. In the ideal world you will not need to use the money in your emergency fund, and it will maintain for the long term but this can provide you with an interesting choice, a long term account that holds short term, low interest investments.
To alleviate you from this choice and enhance your returns it could be a good idea to divide your emergency fund in two:
- Short term emergency fund – this is the place you go to when you have an immediate emergency therefore it needs to be an instant access account and as so it will probably offer little in way of interest. You should have a debit card attached to this account. The short term emergency fund is for those little emergencies like repairs to your car or replacing a large household appliance. Not only this, it could also be useful to bridge the gap until you can access your long term emergency fund.
- Long term emergency fund – this allows you to save for large scale emergencies such as a natural disaster or losing your job. This type of account will earn a slightly higher interest rate and whilst it is still important that you can access you can be safe with investments that may take a few days to liquidate as you have the short term emergency fund to tide you over.
Having an emergency gives you peace of mind. There is no having to scramble about trying to raise funds and better still there is no turning to credit cards. It does not matter if your emergency can’t handle everything, every little helps and will reduce the amount you may otherwise need to borrow.
Many people are good at coming up with excuses when it comes to saving for an emergency fund. Whilst there are numerous reasons why one cannot build an emergency fund the following are some tricks on how you can build an emergency fund where you may have struggled before.
Treat the Emergency Fund like An Expense
Maybe not the most creative way to build an emergency fund but you could make it a little more fun by getting someone to bill you for the amount! This type of plan works really well if you get someone who will pursue you relentlessly until you pay up! Try giving your children this task and not only will they be part of the family finances but they will also be learning the basis for financial matters which will stand them in good stead in the future.
Pretend Everything Cost 10% More
Add 10% to the purchase price of everything you buy and then put this amount aside to build an emergency fund. You will be surprised how quickly your fund will grow and whilst it makes all purchases that more expensive it can also help you to buy less and save more! Another way is to pretend the utility bill is doubled, just be creative and you will soon get there.
Save each $5 Bill
Another great way to build an emergency fund is to save every $5 bill that you get given, a sure fire way to see those savings grow.
Pretend Gas is $5 a Gallon – Save the Difference
While gas is expensive we don’t seem to be driving less, therefore another great way to build an emergency fund would be to pretend that gas costs $5 and then save the difference. Do the calculation every time you fill up and deposit the difference into your emergency fund.
Rewards from Credit Cards
If your credit card does not give some generous incentives then swap it to one that does. Once you have the rewards use these to build an emergency fund.
Sell Your Old Stuff
We all have things lying around the home that they do not use and could easily be sold. Start selling and start to build the emergency fund with the profits.
We welcome any suggestions on how to build an emergency fund and these can be invaluable for some, so please share your thoughts.