There are always going to be bills that you didn’t plan for, whether it’s an unexpected visit to a physician, a vehicle repair, or the need to replace an item. Debt may be a slippery slope if you’re already having trouble making ends meet because of unemployment, underemployment, or a plethora of competing financial goals.
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What is an Emergency fund?
An emergency fund, as the name implies, is a stash of cash set up for use in times of need. Although there is no hard and fast definition of an emergency, it should only be used for really necessary purchases.
Alternatively, money put away for unforeseen medical costs, major auto repairs, home appliance replacement, and other such costs is known as an emergency fund. Unemployment.
A damaged phone screen may be replaced with money from an emergency fund, but that money shouldn’t be used to purchase an exquisite grocery blender. The secret to a good emergency fund is to only utilise it when you are in desperate need.
Why is Emergency fund important?
Building an emergency fund might provide you the peace of mind that you’ll be able to handle when an unforeseen expenditure crops up. It might be difficult to put away a large quantity of money when you have regular expenses to cover, but even a few hundred dollars can make a difference. And once you start saving, you could find it easy to create momentum and develop this account.
When saving, create a boundary between emergencies and everything else. Having an emergency fund is essential, but it’s also smart to start a “rainy day” savings account for things like vehicle repairs, holidays, and seasonal wardrobe purchases after you’ve reached a comfortable level of financial security. Opening several savings accounts or even subaccounts might be helpful if you’re having trouble keeping track of your money.
Everyone should have a rainy-day fund set up. Having something in reserve might be the difference between surviving a short-term financial storm or sinking deep into debt.
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How to create an emergency fund
Here is a step-by-step guide on how to create an emergency fund so you can have money to access during worst-case scenarios.
1. Determine your saving objectives
The first thing you should do when starting an emergency fund is to figure out how much money you can save each month. To make the process simpler, evaluate your current budget or build a budget. This helps you realise how much money you have remaining to save, after eliminating fixed costs like food, insurance and power bills.
Depending on your circumstances, you should save anywhere from three months’ to six months’ worth of living costs in an emergency fund. If you’re having trouble making ends meet, saving 5,000 naira a week may be all you can manage.
The trick is to decrease costs as much as possible without compromising essentials. Cutting less on items like meal delivery and streaming services might help you save more money, but you shouldn’t lose motivation by giving up too much of what you like.
2. Automate savings
The next stage, after deciding how much of emergency funds you want to have, is to begin putting money aside. To save money quickly and easily, automation is your best bet. Arrange for regular deductions to be taken out of your paycheck and deposited into your savings account.
The risk of spending the money before it can be saved is greatly reduced in this method. Whereas if you had your full income transferred into a checking account, you’d have to transfer money to your emergency fund on a regular basis. Because of this, you may wind up spending the money or forgetting to move it to savings.
While your savings should be automated, you may also send more money every time that you have money remaining after your other costs are handled.
3. keep tabs on your progress
Automating your savings is a terrific method to passively add money to your emergency fund, but you shouldn’t set it and forget it. It’s crucial to check your progress and make sure you’re on pace to accomplish your savings target.
It’s also a good idea to make modifications to your savings if your financial condition changes. Increase your payments, for instance, if you get a pay rise or start a new job that pays more. Whereas if you’re laid off, you may need to temporarily suspend or cut the amount you save.
4. Assess and adjust contributions
As with many things in life, preparing for an emergency fund is ever-changing and you should check in periodically to analyse the situation and make modifications as required. Check back after a few months to see how much you’re saving, and adjust if required. It’s prudent to start investing if you’ve amassed a six-month emergency fund’s worth of savings.
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What are the advantages of having an emergency fund?
The money you put away in a rainy-day fund doesn’t have to yield as much interest as your other savings accounts. The following are only some of the many financial advantages that may be gained by regular savings:
Makes You Avoid Debt or Borrowing: Avoiding the need to tap into a credit line or take out a loan to pay for an unforeseen bill is a major benefit of having an emergency fund.
Bringing Comfort: When you have savings set up, you won’t have to worry as much about how you’ll manage a sudden drop in your income. Having an emergency fund may provide peace of mind even if you never need to use it.
Incase of Sudden Job Loss: Your emergency fund may help you get by if you suddenly lose your job and can’t afford to pay your bills until you get your next salary.
Best Of Financial Decisions: Assisting you in making wiser economic choices: Having money set up for emergencies makes dealing with sudden costs much less of a strain. You may be more prone to consent to high interest rates and other unfavourable conditions if you’re under the pressure of trying to figure out how to pay. However, if you have an emergency fund, you will have greater freedom to consider all of your alternatives.
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Conclusion
Maintaining financial stability in the face of unemployment is made easier with the support of an emergency fund. The money you get in unemployment benefits may help you pay for some of your living costs, but it probably won’t be enough to cover everything. While out of work, it may be difficult to keep up with regular costs like rent, food, and insurance premiums unless you have a savings cushion.
