How to Build an Emergency Fund: Strategies for Financial Safety

Ashwin Honawar

Updated on:

How to build an emergency fund

How many times do we find we’ve little or even no cash left and the spending limits on our credit cards are almost over? For anyone in the US or even around the world, this isn’t a happy situation. On an ordinary day, we might find some ways and means to overcome this situation where there’s no money.

Yet, if we have some emergency at home or at work or any other such issue that could be resolved only with cash, we might not be able to resolve the situation. Such scenarios could be when someone needs emergency medical treatment and we need to pay for medication.

Or, there’s some disaster and we need to relocate urgently with the family. There could be even simpler things such as having to pay immediately for your kid’s education.

What happens next? We turn to people such as family and friends or even coworkers, hoping to borrow some money. Sometimes, they help us with a small loan and sometimes, they aren’t truly in a position to help us; they might be having money problems too.

In such a situation, the best thing that we could have is an emergency fund.

What is an Emergency Fund?

An emergency fund is very important for all, individuals, families and households, businesses and large corporations too. That’s because nobody can foretell when anyone could run out of cash at hand.

Generally, an emergency fund is something that you don’t touch. It is a fund that you build over a period of time and use only when there’s some pressing emergency.

Emergency funds are also called corpus funds or hedge funds. That’s because they allow the individual, household or organization to safely overcome any exigencies, without the need to ask for loans or money from people or banks or any other resource.

An emergency fund is always open-ended. That means, there are no lower limits or upper limits on how much money goes into an emergency fund.

Furthermore, the money for an emergency fund is never stored at home or office in a cash box. In most cases, it will be maintained in an account at a bank or credit union where it can gather some interest and grow.

A few individuals, families and corporations also invest the money they set aside for the emergency fund on various safe plans including Mutual Funds, Bonds or Gold and other assets that can be cashed easily and quickly when needed. That way, the emergency fund grows in value.

You too could use any of these models to build your own emergency fund.

If this sounds interesting, continue reading. I will guide you in steps on how to build a superb emergency fund that you could depend upon, should the need arise. With an emergency fund, you will never have to ask any friends or relatives or even some larger lenders for a loan.

And just in case you don’t use the emergency fund, there’s nothing to worry about: the money continues to grow and make you richer.

Ready? Here are some simple and practical steps to build an emergency loan for you as an individual, your family or even your business.

Build Your Safety Net: A Guide to Creating an Emergency Fund

Step-1: Prepare for an Emergency

Prepare for an Emergency

By this, I am not implying that you would have an emergency right now or possibly in the near future. Maybe you would never encounter an emergency. Instead, I’m asking you to imagine the worst possible scenarios where you might find yourself facing an emergency.

It could be anything like meeting out-of-pocket expenses for some family member who’s critically ill or relocating to a new house if disasters such as fire strikes your existing one.

If you’re into business, imagine a scenario where you’re not making profits anymore for a while but need to keep the venture running and maintain people on your payroll. Also consider various factors such as rent of the business premises, cost of basic infrastructure for communications and Internet and paying suppliers for a few months.

How much money would you require in such a situation? Make a mental math and arrive at a figure. Remember, the larger the figure, the better for the emergency fund that you’re planning to build.

Step-2: Make a Budget

Make a Budget

Anyone spending without a proper budget is wasting money recklessly, in my humble opinion. In fact, a lot of people who adhere to budgets also end up splurging money on things they don’t really require.

However, to build an emergency fund, you will first have to draw a household budget or one for your business. You could do so on a computer or even your smartphone. Nowadays, there are superb free and paid budgeting apps that you can download and use.

Identify all your needs and wants and allot a budget according to each head. For example, you can make expense heads under categories such as food, clothing, housing, entertainment, transportation, education, phone and Internet and so on.

Under each of these heads, allot a specific amount. Now, also include a new head under the category ‘emergency fund’. Allot a specific amount of money each week or each month that you will save under this head.

The first requirement to create an emergency fund is to stick to the budget you created and make sure that you don’t overspend under any head, unless absolutely necessary for your living.

Furthermore, the budget will also reveal some areas where you might be spending high already. Curb these expenses immediately and add that amount to the emergency fund.

Step-3: Choose the Best Plans

Choose the Best Plans

Now that you’ve begun saving money for an emergency fund, don’t let it lie idle. That way, the value of the money will reduce over a period of time. In fact, under the Time Value of Money (TVM) principle, your money loses value by at least 4.5 per cent per year, if not more.

For example, the $100 that you have in your purse or pocket today, will be able to buy you stuff only worth $95.50 a year later, since the value has reduced. This happens generally due to inflation that leads to a higher cost of living. In some cases, the TVM can drop by as much as eight per cent.

Therefore, building an emergency fund means you have to consider the loss in value of money due to TVM, inflation and other external factors. These could also include economic downturns such as the one we saw during the 2020 Covid-19 pandemic.

As the cost of living zooms upwards, the value of money comes spiralling downwards. This simply means you have to provide adequate buffers to the money and ensure it retains the purchasing power you desire and grows.

This is possible by investing it in high-yield plans. You could ask a financial advisor for the best plans with the highest returns for your emergency fund. Broadly speaking, some people and companies invest their emergency fund money in stocks, Mutual Funds, Bonds and Gold.

Others invest in Timed Deposits with banks and credit unions where the money attracts a fixed interest and grows. A financial advisor or your banker could guide you better.

Also Read: How To Beat Inflation? 10 Best Investments for Inflation

Step-4: Boost Your Emergency Fund

Boost Your Emergency Fund

There are always ways and means to boost your emergency funds by adding more money in different ways. The first is by saving from useless expenses. Check your household expenses. You might come across subscriptions that you seldom or never use. Discontinue these and use the money to build an emergency fund. The same holds true for cable TV channel bundles that you don’t watch.

Declutter your home and office by selling off junk that’s no longer useful. The money you get can go to this emergency fund. Similarly, selling off other useless things can also help get some money that you can divert to the emergency fund and make it bigger. If you’re going to invest money from the investment fund, it’s always better to have a bigger amount so that you can get larger returns.

Never throw away the change you get from stores. Instead, collect these coins in a coin box or jar and exchange them at a bank. Any bank will gladly accept these coins and deposit the money in your account. However, for this, you will have to make rolls of the coin using special paper or even some ordinary paper.

Also Read:

Step-5: Save on Your Shopping

Save on Your Shopping

It’s possible to save a lot of money while shopping for your household. One such way to save is by using discount codes and coupons that are available easily online and through store ads. Certain stores such as Walmart also have daily special offers on various stuff that you can buy cheaper. Using discount codes and coupons could help you save up to five per cent on your grocery bills.

The other way to save on shopping is through cashback apps. There are apps such as Ibotta, Rakuten and others where you can get instant cashbacks. Though it’s not possible to withdraw cashbacks as cash, you can always use the money while shopping the next time. This money helps to slash your grocery bills and the saved amount can go to the emergency fund.

Yet another simple way is to get free shopping coupons and vouchers by completing online tasks such as doing paid online surveys, watching ads and playing games on these apps. Some superb apps include Swagbucks and InboxDollars, to name a few.

Wrap Up

Setting up an emergency fund is fairly easy, as you can see from the various steps that I’ve described. The best way to maintain an emergency fund is by never withdrawing any money from it. That way, the fund grows and can also help you during retirement or golden years.

Leave a Comment

How To Create Google MyBusiness | A Quick Guide On Google MyBusiness Top Credit Cards you can get in 2024-23- Pick the best credit card for you with these details Metaverse- The Future Of Finance | Top Finance Companies That Have Entered Into Metaverse Education Loans Can Be Affordable With This Bank’s Assistance | Loan and Bank Criteria  Trying to expand Your Business? Digital Marketing is Very Helpful