Check Out a Smart Guide to Building an Emergency Fund

Do you have enough money to handle an emergency? If health issues, home damage, or any other unexpected situation arises, are you financially prepared to get through the tough times? 

That’s exactly what emergency funds are for. 

These funds are crucial to support and assist you during challenging moments, regardless of the issue’s origin. However, building an emergency fund is no easy task—it requires a great deal of effort and commitment. 

To help you, we’ve put together some essential tips to create your emergency fund and bring you peace of mind. 

Understand what an emergency fund is

The first step is understanding what an emergency fund actually is.

Essentially, it’s a savings account or a dedicated financial reserve meant exclusively for storing money. Unlike investments, an emergency fund doesn’t need to prioritize returns. 

For this reason, many people prefer to separate emergency funds from investments. After all, investments often involve higher risks to achieve better returns.

Emergency funds, on the other hand, are specifically designed to avoid risks. The best approach is to keep these funds safe and readily available when needed, without worrying about generating income. 

Create a comprehensive and efficient budget

Before thinking about saving for your fund, you need to create a budget. 

Use all available tools, such as spreadsheets, apps, or other financial management platforms. Write down everything, ensuring an accurate relationship between income and expenses, both for your regular costs and potential projections. 

A good budget needs to be realistic. Include only the expenses you actually incur, not those you wish you had. Additionally, it should be easy to update, so choose tools that make it quick and simple to add new data. 

Make saving money a habit

Building your emergency fund depends heavily on saving money, which isn’t always easy. 

To save effectively, you need to develop the habit of being frugal. Small daily changes can make a big difference, especially by cutting out unnecessary expenses. 

To build your emergency fund, you’ll need to reduce spending and prioritize saving. There’s no way around it. 

Find the best place to store your money

You need to choose a reliable and efficient place to keep your emergency fund. Even though it’s not meant for investments, you shouldn’t just store it anywhere. 

Some banks offer better conditions than others, such as favorable terms or higher interest rates.

You might also consider tying a portion of your fund to secure investment options, allocating part of it exclusively for emergencies, which can be a very smart approach.

Start small and from the beginning

Unfortunately, there’s no guarantee you’ll have the money to cover an emergency when it happens—precisely because emergencies are unexpected. 

However, you can do your best to prepare, and to do so, you need to start somewhere. 
Don’t set unrealistic goals, like saving thousands of dollars right away, as this might create a target that’s unsustainable in the long run. 

Stop spending money without tracking

When creating your budget, it’s essential to include all your expenses properly. 

Yet, it’s common to lose track of some costs, such as recurring charges on your credit card for services you no longer use—like streaming subscriptions. 

Make sure to map out all your expenses regularly and cancel anything unnecessary. Be thorough and apply smart filtering to identify and eliminate wasteful spending. 

What truly counts as an emergency? 

Defining what qualifies as an emergency is crucial for maintaining financial stability. 

Does this mean you can withdraw funds at any moment? Should you dip into your emergency savings for minor daily setbacks? These decisions can be tricky. 

Experts recommend having at least three months’ worth of your monthly expenses saved in your emergency fund. This provides a financial cushion for subsistence in case of unforeseen situations. 

For more severe scenarios, the required emergency fund might need to be much larger, though such situations are harder to anticipate. 

In any case, you must reserve these funds strictly for genuine emergencies, using them only when absolutely necessary during truly challenging moments in your life.

Written by

Gabriel Gonçalves