Many thanks to the Synergy Health team. This article has been re-published on the Bounce blog site with permission from Synergy Health.
In the good times, it can be easy to be a bit loose with money. But as darker economic clouds appear on the horizon, it is now perhaps a good time to be more mindful and intentional with our money and finances. Good money habits don’t just happen, however. Like so many other aspects of our wellbeing, strong financial health is a skill built from awareness, reflection, and a solid understanding of our values and intentions for whatever stage of life we are in.
An emergency fund is an essential component of good money habits and a sound financial plan. It is a sum of money set aside for unexpected expenses, such as job loss, medical bills, or car repairs. It is typically recommended that your emergency fund should be the equivalent of at least 3 months of typical expenses. Having an emergency fund in place can provide peace of mind and help you avoid taking on debt during difficult times. Unfortunately, many people do not have an adequate emergency fund, or do not have one at all.
An emergency fund is an important safety net that can help you avoid financial distress in the event of an unexpected expense. Without an emergency fund, you may have to rely on credit cards, loans, or other forms of debt to pay for unexpected expenses. This can quickly lead to a cycle of debt and interest, which can be difficult to escape from. An emergency fund, on the other hand, can provide you with the financial security you need to cover unexpected expenses without adding to your debt. Another reason why an emergency fund is important is that it can help you manage financial stress. Unexpected expenses can be stressful, especially if you are not prepared for them. Having an emergency fund in place can help you feel more secure and in control, even in the face of unexpected expenses. This can help reduce your stress and allow you to focus on other important aspects of your life.
Despite the many benefits of having an emergency fund, many people make common mistakes when considering the establishment of an emergency fund. Some of the most common mistakes include:
Not having an adequate emergency fund. Many people believe that they only need a small emergency fund, or that they can rely on credit cards or loans in the event of an emergency. However, this can be a dangerous assumption. You should aim to have enough money in your emergency fund to cover at least three to six months of expenses.
Not making it a priority. Establishing an emergency fund should be a priority in your financial plan. Unfortunately, many people do not make it a priority, and instead focus on other financial goals, such as paying off debt, saving for retirement, or investing in the stock market. While these goals are important, it is essential to have an emergency fund in place before pursuing other financial goals.
Not considering all potential expenses. When establishing an emergency fund, it is important to consider all potential expenses, not just the most common ones. This may include expenses related to job loss, medical bills, car repairs, or natural disasters. Make sure you have enough money in your emergency fund to cover all potential expenses.
Not regularly contributing to the fund. Once you have established an emergency fund, it is important to regularly contribute to it. This will help you build up your emergency fund over time and ensure that you have enough money when you need it.
Having the emergency fund tied up in investments, shares, and property.
Investments, such as shares and property, can be subject to market fluctuations and may not be easily accessible when you need them. Additionally, if you need to sell off your investments to access the funds, you may have to do so at a loss.
It is all well and good looking at your investment portfolio on an upswing and feel that you are safe in the event of an emergency. But what if the emergency is in the middle of a down swing? If you need your emergency funds because your car has broken down AND the market is down 30%, not only are you out of pocket for the emergency vehicle repairs, but you have locked in your investment losses.
This is why it is important to have your emergency fund in a cash form, such as a savings account or money market account, which is easily accessible and not subject to market fluctuations.
Getting started with an emergency fund can seem daunting, but it does not have to be. Here are some steps you can take to get started:
Determine your expenses: The first step in establishing an emergency fund is to determine your monthly expenses. This includes your rent or mortgage payment, utilities, food, transportation, and other expenses. You should aim to have enough money in your emergency fund to cover at least three to six months of expenses.
Choose an account: Once you have determined your expenses, you need to choose an account to hold your emergency fund. You may consider a savings account, money market account, or short-term deposit.
Automate your savings: One of the easiest ways to build an emergency fund is to automate your savings. You can do this by setting up automatic transfers from your checking account to your savings account. This will ensure that a portion of your income is automatically set aside for your emergency fund, so you don’t have to think about it. You can start small (such as using micro-saving or round-up apps) and increase the amount as your budget allows.
Cut expenses: Another way to build your emergency fund while saving is to cut expenses. Take a look at your monthly budget and see where you can reduce your spending. You can start by cutting back on non-essential expenses, such as eating out, entertainment, and subscriptions. You can also consider negotiating bills or finding cheaper alternatives for services you use regularly.
Habit stacking: All of us will tend to have some sort of habit or vice that can soak up our precious income, even if it is just that daily cup of coffee from the cafe. Rather than cut the habit altogether, which is just sadness, we can moderate the habit (do it a bit less) but also stack saving alongside it (which can also have a moderating effect). Whenever you decide to get that coffee, order Uber Eats, or have that boozy night out, then you have to set aside the equivalent amount spent in your emergency fund.
Earn extra income: If you have a lot of expenses and a tight budget, you can consider earning extra income to help build your emergency fund. You can do this by taking on a part-time job, freelancing, or selling items you no longer need. This extra income can be put towards your emergency fund, helping you build it faster. Additionally, you can also consider starting a side hustle, such as pet-sitting, dog walking, or tutoring, to earn extra cash.
Building an emergency fund is an important step in securing your financial future. By automating your savings, cutting expenses, and earning extra income, you can build an emergency fund while saving for other financial goals. Remember, it’s never too late to start building an emergency fund. The key is to start small, be consistent, and make it a priority in your financial plan.
