Personal Finance,Tips & Tricks

Financial Planning Foundations: Accumulate An Emergency Fund

22 Mar , 2015  

Nikhil (Nik) Sreedhar
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Nikhil (Nik) Sreedhar

Founder at ProAdviser
Nikhil's dream job is to be an exotic car salesman. His favourite colour is orange and it shows as he is the 23 year old entrepreneur behind ProAdviser. You should follow him, he gets lonely.
Nikhil (Nik) Sreedhar
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Life is full of unexpected moments, and some of those happen to be emergencies, like unemployment, a stolen computer, or a mugging on the street. But these events don’t necessarily need to leave you in despair. By setting-up an emergency fund and adding to it regularly, it will offer you peace of mind if you ever encounter a difficult situation. Allocating money into the fund may seem daunting, but by taking charge of your expenses and proper budgeting, it is easier than you think. Even putting away a few dollars a month can make a difference if you have nothing at the moment.

Some unexpected moments may be thing you can easily deal with, like a mobile phone with a cracked screen. Then there are moments that are entirely different, like a child or spouse in the hospital, and the medical bills that follow. Yet for unexpected moments that pertain to your house, there are some things you can do. To prepare for your emergency fund, take an inventory of your house and write down what may need repairing or replacing soon. Also, to anticipate for a medical emergency, talk to people you may know that have gone through surgery or had a severe illness. These things should give you an idea of how much you should save, or aim to save for.

Think about how you transport yourself as well- if you have a car, think about how often you get it serviced, and what are some things that could go wrong. Think about the age of the car as well, and estimate how much longer it will be able to function before you need a new one. If you are unaware of how to get an estimate for the longevity of your car, do some research, or ask the opinion of a qualified car mechanic. And don’t neglect thinking about family emergencies- if you live away from family and need to travel to their home quickly, address that as well in the budget, and estimate how much the cost of travel would be in instances like these.

While compiling all the things on the emergency list, and you still can’t figure out a budget for an emergency fund, take heed of a simple rule. Aim to set aside $500-$1000 for short-term expenses that are unplanned. If you practice saving $10 a week, that will add up to more than $500 in a year, which is hopefully sufficient if it is needed. Even if you run into a situation where you need more than that, at least the short-term emergency fund will help you in covering the costs, rather than not being able to pay any of it. However, you will also need to think about the long-term, and what happens if you get a severe illness or lose your job. These types of situations will often require more money as they cover more time. So try to have enough in your emergency fund to cover 2-3 months of expenses which would include rent, food, utilities, internet, whatever else you need on a monthly basis. Having those expenses in mind covering 2-3 months will give you a better picture of how much you need for your fund. Just remember that if you are self-employed or if you do not have a regular income (perhaps you only do freelance work), it would be wise to save even more than for 2-3 months.

If and when you need to access your emergency fund, make sure that it’s easily accessible. If you are placing your emergency fund in a bank account, think about placing it in a savings account with a competitive interest rate. You could even set-up automatic payments to be placed in the account every month on a specific day. However, make sure that you look into all the terms and conditions for the account, as some will charge extra fees for certain services. Lastly, apart from the emergency fund, consider having life insurance. Having life insurance can also protect you in case of emergency, but be sure to read all of the documents that come with a specific provider before making a choice. Apart from life insurance, there is also income protection insurance that will cover you for a certain percentage of your income if you happen to fall ill or if you suffer an injury.

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