Emergency Funds: Step by step guide to build one

No matter your financial situation, having money set aside in an emergency fund is essential to cover unexpected depenses.

In the previous post Emergency Funds: Importance and How to Build One we saw the importance of having an emergency fund, today we will see how to build one with a simple step by step guide.

How to build an emergency fund ?

Step 1: Decide on how much you need to save

The amount you need in your emergency fund will depend on your lifestyle. In general, people aim for three to six months worth of living expenses. 

Once you know the amount you need, look back on your expenses habits to identify areas where your money goes and areas where you can reduce or eliminate unnecessary costs.

Doing that will allow you to know exactly how much you can allocate each month to your emergency fund.

Note: The more you save, the better

Step 2: Select the right account

Don’t hesitate to look around, do some research and compare. For an emergency fund you should look for a saving account that pays you back by offering a high-interest rate to add to your savings.

Note: Consider online banks

Step 3: Start small but start now

You probably want your emergency account to grow fast but it’s important to keep in mind that building one is not something you do overnight. It takes time and discipline. 

A great tool to stay disciplined and also reduce the temptation to spend your money when you get paid, is to automate your savings by setting an automatic transfer to your savings account. 

The most important thing is to start, even if you can’t allocate a big amount of money as long as you stay consistent your emergency fund will start growing.

Note: Starting small is better than doing nothing at all

Step 4: Resist the temptation

Always keep in mind that your emergency fund is for emergencies only such as:

• Job loss
• Car or home repairs
• Medical bills

 Stay disciplined and make it a rule to not touch it for non-essential reasons.

Step 5: Review and adjust

Life is full of surprises. It’s essential to review your emergency goals to make sure they still match your current financial situation and lifestyle.

If you had to use your emergency fund don’t let it shrink, review your living expenses and make a plan to fill it up.

By following these easy steps I hope you will be able to build an emergency fund that will provide you financial stability and a stress free mind. Building a robust emergency fund takes time, be patient even if you progress slowly.