This is a saving arrangement that everyone should have to handle financial emergencies. You must treat it like a default cash reserve which will be easy to reach out for. Any of the unprecedented necessities can be managed when you have such provision in place.
An emergency fund is a personal cash backup to protect you during uncertain times. Imagine a situation when you have allocated your earnings for different purposes. Some for child’s education while some for other financial goals like purchase of a home or car.
The money that is left in your pocket will go into usual necessities. In this scenario, if a sudden necessity like an unplanned medical expense pop up, you will not have money to pay for it. Since it is a medical emergency, you cannot overlook or postpone it.
When you do not have resources available to meet unforeseen needs, this cash reserve will come in handy. You can extract the required amount and disburse the medical bill. With this arrangement in place, you do not have to take out cash meant for vital financial goals.
Thus, your financial commitments and unplanned expenses can be managed simultaneously. Now, you cannot have a built-in cash reserve with funds available to be used. You must put in efforts and keep aside money for this emergency fund.
First, you must have a complete overview on this and how it works and all the related concerns.
Everything about emergency fund you must know
Having a go-to cash reserve for emergencies can be a blessing. Then, you will not have to borrow money now and then. You will have a secret place to count upon whenever some unexpected cost pops up.
This fund plays a vital role in keeping your financial goals immune. Imagine what you might have done to pay a sudden bill for your ward’s school activity if you do not have an emergency fund. You might have to adjust some amount from the money i.e. going into your financial goals.
In that case, their growth will suffer and you might not get the desired return at the desired time. Focus on having an emergency fund so that you can manage all financial responsibilities effectively. Find out more about them by exploring further.
1. Difference between sinking and emergency fund
Oftentimes, people gets confused between these two terms. This is because both serve the same purpose almost. However, there are points where they differ from each other.
A sinking fund is created to meet a planned purpose. This means that you know that a particular expense will appear in the future. For this reason, you want to keep aside money so that you can address it without fail.
It will have a defined timeline to beat which might vary depending on the goal you will have to achieve. The amount of money you must contribute should be specified from before and will be according to the purpose you have to meet.
On the other hand, an emergency fund is meant for purposes that are unknown. This gives you the liberty to use them for whatever unexpected reasons. You can contribute for it as long as there is need or you want to continue.
With it, you can have immediate access to funds whenever any need arises. On the flip side, the other one can be utilised only when the timeline is completed and the purpose is due.
2. Steps to build an emergency fund from scratch
No worries if you do not have such arrangement in place. You can begin the creation process the moment you felt the need. There is no compulsion regarding the time when you must start working on an emergency fund.
It does not matter if you are salaried or earning money from a part-time income. If you are comfortable saving money even from pocket money, you can go ahead. All you need to do is to follow some basic steps.
3. Understand your goals
It is like unveiling the motivation to start this journey. You might have encountered a situation which made you realise the significance of this saving arrangement. Thus, you must have a background story to push you ahead.
You can even start without a purpose, but you might have to deal with inconsistency issues. Thus, understand the milestone you want to achieve. This will let you have clarity about the amount of money you should save in the initial phase.
4. Create a budget
Figure out the amount you can save for this purpose. For this, you must deduct expenses from your current income. This is what you have to do to make a budget.
Therefore, even building an emergency fund will need you to go through this step. Once expenses are subtracted, you will know the amount that remains. From that, you can determine that go towards this saving provision.
3. Depend on automatic saving
Manual saving is possible, but again, you will have to rely on your memory. Now, some tough months might compel you to overlook such saving attempts. Stashing money for emergencies might seem trivial as compared to some urgent payout.
These types of distractions will appear and you will have to cope with them. One of the safest way to make sure that you are able to save money is by automating the process. Set the decided amount and the time when the money will debit from your account.
Thus, you will not have to remember. Above all, you will not have to handle the process manually. When saving takes place at the back end, you will not think of utilising the available funds for other purposes.
The bottom line
Despite having this saving provision, you might have to get high-acceptance payday loans from direct lenders. It might happen when the saved money is not sufficient for the necessity. In that case, a loan that you can obtain at affordable rates can be a convenient option.
Again, while repayment, you can depend on your emergency fund. You can manage the usual necessities with the saved money while utilising some amount of salary for loan payments. Then, everything will be in your control.
Having worked as a research analyst for 10 years, Archie developed his interest in consulting people struggling to manage money and now working as a Financial Consultant at Onestoploansolution. He is postgraduate in banking and accounting. For his a normal day starts from assessing the application and helping borrowers with getting more control over their finances. Archie Leo contributes to the finance blog of the company where he has written a lot of articles covering a wide range of topics such as budgeting, investing, saving and building wealth. His goal is to make people’s life easier with money.
