Emergency Fund – Why And How

Let’s be honest – life happens. It can bring our whole lives down. But we never know when it will happen. If banks gets to be bailed out by the government, then why not set up a safety net for yourself to bail out yourself in case of some unpredictable life event? Emergency fund is the basics to your sustainable financial plan. It is a savings account, where you save up money of minimum 3 months of your salary.

Why

  • Helps you to secure a mortgage, borrowing, renting property or signing any other contract.

Having an emergency fund means that you have an immediate access to money in case you need it. Lenders and providers see it as an insurance in case you are unable to pay off whatever you’re signing up for. They can even offer better interest rates if they know they can trust you!

  • Creates confidence

If you got an emergency fund, then it should mean that you’re secured against physical injuries to a certain extent. You want to live an exciting and fulfilling life but don’t want to be worried about your money? Then generate an emergency fund and off you go – break a leg!

  • Secured against loosing your job

Especially right now, in the midst of recovering recession and people loosing jobs due to COVID changes in organisations, we are all in risk of losing our jobs. But, to be frank with you, we’re never really out of that risk. Having an emergency fund gives you that insurance in case you have to look for a new job.

  • Decreases discomfort from broken assets

By assets I mean – your house, car and whatever in your house that you’re using daily (fridge, TV, ect.). If your car where to break tomorrow – would you be ready to pay in a lump sum off the bat? If not, then you would have to deal with figuring out how to pay for the repairs and where to get them cheapest. But, if you had an emergency fund, then all of this stress either wouldn’t be an issue at all, or at least wouldn’t be so great.

  • Helps with decision making

It is a wide-known fact that stress releases cortisol – the chemical that makes us feel stressed. This chemical also slows down our brain processing ability, which doesn’t help when we need to make a decision. When unexpected and traumatising life evens happen, we’re more likely to make more mistakes to add to it. But, if you have an emergency fund, you can avoid or reduce effects of stress on your life.

  • When you have a reason to celebrate – you can really go all out!

Did someone in your family just suddenly got pregnant? Or you suddenly won a trip to Hawaii and need some extra cash to spend there? Emergency fund is not just for when things are bad, but when things are pretty great too.

How

  1. Work out how much you’re spending per month (estimate it as accurate as you can, but don’t worry if it’s not like that every month) – these expenditures should include all your bills, food expenses (without takeaways), travelling expenses, subscriptions you pay every month and personal care expenses.
  2. Multiply that number by 3.
  3. Divide the result by however many months you want to spend saving for emergency fund (e.g. you can plan to save X amount in the next 6 months = X/6)
  4. There is your saving goal per each consecutive month starting from today/tomorrow!
  5. Don’t miss a month or a day from your plan, but if you have – compensate for it in the next month (not the one after that, but the next one!).

Thank you for reading this post, I’ll be back to you with more money wisdom’s for artists tomorrow!

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