Emergency Fund – Top 5 Tips to building yours
What would you do if the sky fell in tomorrow? I’m not talking about a little acorn here; I’m talking about a real-life emergency. I want you to take a moment to stop and think about this… If tomorrow you were to lose your job, or you got really sick and could no longer work. Perhaps even if your much needed car were to explode and break down…. How would you cope?
We all have things that we need to plan for in life, like buying a home, purchasing the groceries, and maybe even finally going on that dream holiday. But what happens when life throws us that proverbial curve ball? All too often, we don’t plan for those unforeseen expenses. I am talking major auto repairs, unplanned travel, and medical emergencies. What if I were to tell you that you didn’t have to go into debt when these unforeseen, yet inevitable events arise?
You need to plan, and it all starts with a Spending Plan; a new and very sophisticated way to look at budgeting. A Spending Plan is a simple and easy way for you to take your financial future into your own hands. With a Spending Plan, you can plan everything from your current financial commitments all the way through to your emergency fund. Follow these five tips to help you build your very own emergency fund that gives you peace of mind, when life gives you curve balls.
1. Get started & Set your emergency fund goal
This bit is simple, think about how much money you want to have in your fund, and consider when you may need it. Research suggests having enough money to cover at least three months of your general/day to day expenses minimum. That may not be realistic for you right now - and that’s okay. I think we can all agree that getting started is the most important step in building an emergency fund. So first and foremost, set a goal that is realistic to you and your (very own personal) circumstances, and get started.
2. Define your essential and non-essential expenses
One of the first steps in a Spending Plan is working out exactly where all of your hard earned money is going. If you are new to budgeting, thinking about all the financial commitments you NEED to pay for take priority. Think about all the bills you need to pay (rent, home loan, phone, internet, insurances, etc.), really think about all the expenses you currently have. A lot of these expenses are essential, but the more you assess where your money is actually going every week (month, year, etc), you will begin to realize that a lot of these expenses are actually non-essential. These non-essential expenses are typically things like, eating out, having four takeaway coffees a day, going to the cinema, and purchasing “feel good” items (fabulous shoes in more than one colour, for example). You can keep track of all of your expenses (no matter what they are) with a Spending Plan. A Spending Plan is a sure fire way to visualize and determine your essential and non-essential expenses. Deal breaker!
3. Plan out how you will achieve that goal
Now that you know how much money you want to put aside for a rainy day, and you know what your expenses are, you can now begin to put in the work in to achieving your goal. When planning your emergency fund you need to take your current saving goals (if you have any at all), as well as your income into account. Look at different ways you can cut back on your expenses. This is where you need to be merciless. You need to be transparent and unforgiving and start cutting back heavily on unnecessary spending habits. Refer to all of your expenses (both essential and non-essential) and again, look at all the places where you can shrink or better yet; completely eliminate any unnecessary spending to achieve your desired goal. Every little bit counts, trust me!
4. Avoid temptation
When saving for anything, there is always the temptation to spend what we have saved. We tend to fall back into old spending habits that no longer (or ever have for that matter), benefited us. A good way to avoid temptation is to create a specific account for your emergency fund. By selecting a completely separate, high interest savings account you will attract interest when you contribute to it. Another great way to reduce (or even eliminate) temptation is to opt–out from having this account linked to a debit card… Make it harder for yourself to access this money easily. Take it out of your sight!
5. Remind yourself what you are saving for
Remind yourself that an emergency fund is just that – an emergency fund. Think of it only as a safety net, there to catch you when you fall. It is not a chunk of change for everyday expenses; it is not your next plane ticket to your dream vacation. (That’s what your savings account is for) DO NOT touch it until you need it, because when you need it… you will NEED it!
There you have it! 5 Steps to creating your very own Emergency Fund.
For more information on Spending Plans, book in here to make an appointment for a no obligation chat. I look forward to hearing from you.
Sam 0404 468 525