The current recession and inflation have resulted in many organisations laying off a significant number of employees. As a professional, waking up to discover that your role has been made redundant can be a daunting experience, but it’s a reality that many people have had to confront. In these uncertain times, having an emergency fund can make all the difference in coping with unexpected financial hardships. An emergency fund is a money set aside in an account for unexpected expenses, such as periods of unemployment, legal trouble, bereavement, or serious illness. This fund is typically held in an easily accessible account, such as a savings account.
Preparing for unexpected events and saving for them is crucial for everyone, especially during tough economic times. Although it can be challenging to save when there is barely enough for daily expenses, it’s necessary for long-term financial stability. An emergency fund serves as a buffer that helps you get through difficult times. Moreover, it enables you to avoid borrowing when the need arises. With an emergency fund, you can have peace of mind and confidence to handle any unexpected financial challenges that may come your way.
How to put together an emergency fund
There are several ways to build an emergency fund, and here are a few of them:
- Firstly, saving should be a priority, not an afterthought. When receiving your paycheck, prioritise paying yourself first before settling your bills, and spend any remaining amount. This helps ensure you save a portion of your income.
- Next, you need to calculate how much you need to save. Typically, your emergency fund should be able to cover up to six months of your living expenses.
- After that, set a monthly savings goal and automate your savings by setting up your account to deduct a specific amount each month. This will prevent you from forgetting to save or using the money for other purposes.
- Another way to build an emergency fund is to save your change. Set aside a jar to keep loose change, such as when you receive a cash gift. Once the jar is full, transfer the money into your emergency account.
- Cutting down on expenses is also crucial to achieving your savings goal. You can reduce the number of times you eat out, stop unnecessary subscription payments, and more.
- Periodically assessing and adjusting your savings is essential, especially if you’ve recently needed to use your funds. Checking your emergency fund savings often and making necessary adjustments can help you reach your savings goal.
- Finally, you can let your money grow by putting it in a high-yield savings account, money market account, or other investment options. Every extra pound counts, so make sure you’re getting a good return on your investments.
Types of emergency funds
To better manage your savings, consider dividing them into short-term and long-term emergency funds.
Short-term emergency funds are suitable for covering unexpected expenses like car repairs or replacing a broken appliance, as well as for accessing immediate cash while waiting to reach your long-term funds.
For bigger expenses, such as job loss, health issues, or natural disasters, it is important to reserve long-term emergency funds. Make sure to keep these funds separate from your short-term funds, but still easily accessible when needed.
What counts as an emergency?
To use your emergency fund properly, it’s important to have a clear understanding of what constitutes an emergency. The purpose of your emergency fund is not for leisure or entertainment. Buying non-essential items like a flashy TV because your old one broke down doesn’t fall under this category. An emergency is an unexpected bill that you can’t pay.
Some examples of emergencies include:
- Health emergencies – sudden health problems could result in heavy medical bills or require immediate operations, making it necessary for you to sort out the bills
- Family emergencies – sudden death or other family emergencies, might necessitate travel or require you to make arrangements for settling associated bills.
- Car repairs – cars can break down or be involved in accidents at any time, incurring unexpected expenses for repairs.
- Replacing a major appliance – major appliances such as a deep freezer, or air conditioning unit could break down, necessitating expensive repairs or replacement.
- Job loss – job loss can happen at any time and while you try to get another job, you still have to pay bills and care for your family.
In addition to building an emergency fund, it’s also important to take steps to recession-proof your career. This means developing skills that are in high demand, building a strong professional network, and keeping up with industry trends. This proactive approach can also increase your job security and prepare you for economic downturns. So, while building an emergency fund is crucial, it’s also important to invest in your career to ensure long-term financial stability.
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