Set a target and start building your insurance against life’s uncertainties
So you know why you need an emergency fund and you’re ready to start building your own BBEF (best back-up emergency fund) as insurance against life’s uncertainties.
The difficulty is how to get started and, in a world, where we are directly marketed to, it can be really difficult to give up something we want now on the promise that it could service a need we might have later. But as someone who has had to travel internationally at short-notice, I can tell you now that having the cash available to be able to go and see a loved one when they need you most is peace of mind worth sacrificing for. That feeling of security is priceless and to get it, you need to start building an emergency fund, with five steps to get you there:
1. Open a dedicated savings account
The first step is to open a dedicated savings account, separate to the bank account you typically use for everyday expenses like your morning coffee or what I like to refer to as your tap and go card, where you don’t overly think about your purchases. Given how important your emergency fund is going to be, putting it in that separate account means you aren’t tempted to touch it but that it’s liquid enough that you can access it when you need it.
When selecting your dedicated savings account, make sure it works for you through a competitive interest rate and check that you’re not paying any hidden fees. I personally use the ING Savings Maximiser because it’s a competitive rate, I don’t pay fees and at the time of writing, I also don’t pay international transaction fees for shopping overseas. We don’t tend to switch bank accounts that often so you owe it to yourself to pick an account that will work in your best interests.
2. Set a target
The second step is to set a target to aim for. As a starting point, I’d recommend $1,000 given the number of people who don’t have this as additional available cash for unexpected emergencies. You can break that up into $100 smaller targets, each one leading you to the ultimate $1,000 goal. That $1,000 is achievable for most people whatever their income but will just take some people longer than others. Don’t use that an excuse to hold you back, keep going and thank yourself later when the next emergency hits and you’re able to manage it without breaking a sweat.
3. Build it into your budget
Third step, is to make a regular contribution from your emergency fund. If you’re looking at budgeting apps like YNAB, you could assign a portion of your budget toward your emergency fund each week. I’ve also set up automatic transfers from my bank account so that I know that money will make it to my emergency fund each week without me having to rely on willpower alone to save that money.
4. Sell what you don’t use
Step four is something I do regularly which is to sell items I no longer use. I started doing this when I realised that truth we generally ignore – that truth being that I had a wardrobe overflowing with clothes but somehow still had difficulty finding something to wear when I needed it. It’s something more of us struggle with as clothes become cheaper and direct advertising means that we’re more tempted than ever before to keep buying new. My personal rule is that if I buy something new, I need to pass on what I already have and this served me to start using eBay 8 years ago to sell the items that no longer served me, passing them onto someone who would use them again. If you need cash for your emergency fund, check out how you can make money from your wardrobe to start turning items you no longer use into cash.
5. Cut expenses
I have something to confess. I drink one coffee a week and sometimes skip it altogether. It took me a while to get there and it’s not for everyone – pity the fool who would try and take away my daily morning coffee at the work café 6 months ago – but what got me there was finally looking at how much I was spending each week, month and year in that café. Once I got honest with myself, I realised that the daily coffee had morphed into three daily coffees and a morning muffin that was once a treat but soon became a daily routine.
Now, you are under no obligation to cut out or down on your coffee purchases. But what I would encourage is that you look at your spending habits and find areas where you could cut down on your spending. If you first look at monitoring your spending with a budget, you can then start to become more efficient with your spending over time and drive that extra money toward an emergency fund as a gift to your future self.
And when you hit $1,000 in your bank account?
Congratulate yourself, have a small celebratory win and keep going forward toward your next goal: 3 months of living expenses. Think about what having 3 months of living expenses would mean to you. It’s the time off work to look after a sick family member, breathing space to quit your job if your new boss is a nightmare – you can afford to back yourself and afford your choices in life, which is something that everyone deserves.
Getting your emergency fund together will take us different amounts of time to achieve but once you hit that target, you’ll feel more comfortable knowing that you’re cushioned against future financial shocks.
Read more: Financial Literacy Hub