You got to be prepared for the unexpected. And financially speaking, “be prepared” means having an emergency fund that you can use whenever you find yourself in a tough situation.
Lately, the world hasn’t been a place where we can actually foresee things. Actually, for the past 2 years, we’ve been encountering global situations that we’ve never thought we would see. For example, we never would have thought that this sanitary crisis was gonna put our world upside down and that the US economy would suffer a massive contraction.
All of this means that we don’t actually know when things can get harder.
That’s why you need to have a financial backup to use it when your income stays short. Here in Oxford Funding, we will explain why it is important to have one before getting one of our Oxford Finance Services.
What is an emergency fund?
An emergency fund is exactly what it sounds like, it’s an amount of money saved for unexpected situations. This capital will help you out to successfully pass almost all sorts of financial struggles if you have enough money saved.
Now, which is an unexpected scenario?
Well, it’s all the fortuitous events that can suddenly happen when you are with a low guard, such as:
- Medical Treatments.
- Death of a relative.
- Economic crisis.
- Living expenses.
- Home repairs.
- Car repairs.
The idea of having an emergency fund is that you use it before requesting a loan, so you don’t have to pay high interest rates with the entirety of the loan.
Let’s give you an example:
You have an extraordinary situation that requires you to pay $1,000 upfront, and your emergency fund is only $800.
In order to fulfill the $1,000, you will need to request a $200 personal loan, which would be easily approved and will give low-interest rates, instead of borrowing $1,000.
How much emergency fund do you need?
There is not an absolute answer to this question.
You see, the amount of money you should have in your emergency fund will change according to a lot of factors such as:
- The number of persons in your family.
- Your monthly income.
- Your lifestyle.
- The amount of debt you have.
There are other factors but those mentioned above are the most important.
Now, ideally, you should have enough money to cover your household expenses for 6 months in order to say that you are covered in case of a fortuitous event. This is the case if you are a single person living all by yourself.
In case you have a family with children, you should have enough to cover 12 months of expenses.
So, to have your expenses covered by an emergency fund, you need to actually know what those fixed monthly expenses are, and to do so, you need to start budgeting to know where exactly all your money is going..
Below you will find 4 tips to help you out to establish an emergency fund.
Start a budget
As mentioned before, you need to start budgeting all you spend so you can actually start to build your emergency fund.
If you set a budget based on your income and compare it with your monthly expenses you will realize how much money you will be able to save and how long it would take you to have your emergency fund.
You need to take into account everything that is requiring for you to spend money, which would include:
- Household expenses.
- Car rental.
- Car insurance.
- Credit cards.
Once you have all that information, you will be ready to start saving.
Set a date for establishing your fund
Now that you know how much money you can save each month, you need to set a date for establishing your emergency fund.
Let’s say that you save $500 a month, you are alone, with no children and you only have to care for yourself. Your monthly expenses are $2,000, so in order to live for 6 months without an income, you need to save $12,000.
So, in order to have your emergency fund, you need to have 24 months in your savings account in case something extraordinary happens.
It may seem like a lot of time, but trust us, if you do this, you will be safe in the worst situations. And if you want to save money faster, you can look for an extra income.
Make sure you have it all into account
Sometimes we forget to take into account some expenses that aren’t that regular, but if we don’t include those in our budget, it will jeopardize the effectiveness of our emergency fund.
Maybe you won’t be able to save as much as you thought you should be saving.
So, if you did your maths and something is not right, there are some expenses that haven’t been taken into account. You need to figure them out soon.
Commit yourself to your emergency fund
This is the worst part of having an emergency fund.
You see, our mind is not programmed to make us spend each penny we have in our pockets. All the advertisements we see daily in social media or on TV are saying only one thing: spend money.
And that is not only that, we are looking to impress people so hard that we buy things that we don’t need and get loans that we can’t actually pay to do that.
So, you need to be aware that having all that money saved is going to be a temptation.
What you need to do is stay focused, and remember that money will help you or your relatives during struggles.
Where could you save your emergency fund?
The most important part of the emergency fund is where are you going to save it.
You see, people will tell you that the best place to have your money is in cash “under your bed”, because that way it is more reliable and easier to get.
But sadly, that is a common mistake.
There is something called inflation, we are all familiar with it, because it has been melting down our acquisitive power throughout the years. And if you leave that money standing still, without earning anything but dust, it will get consumed by it.
After all, there is a good chance that you will never use your emergency fund.
So, here’s what you can do to have your emergency fund and earn passive income at the same time. You can use a high-yield savings account, where you will earn interest for putting your money on hold there.
It won’t make you rich, but you will be beating inflation in the US and will make you more money for the time you need your fund.
Now that you know how to establish your emergency fund, you can use this knowledge to change your personal financial situation.
And in the case that you need extra money because your fund isn’t enough, you can contact us in Oxford Funding so we can discuss how to help you overcome your financial situation.