How to Start Building an Emergency Fund

How to Start Building an Emergency Fund
Published: 9/14/2019

Updated: October 9, 2019
3 minute read

Emergencies are a part of life. There’s no way that you can avoid them or predict one. All you can really do is to prepare yourself and your wallet for the "What Ifs" of life.

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What Is an Emergency Fund?

In its basic sense, it is a stash of money that is to be used only in times of sudden, unexpected, or impending situation.

Why Do You Need an Emergency Fund?

First, let us define what is an emergency. An emergency, is a situation that may cause injury, loss of life, damage to the property, and/or interference with the normal activities of a person and which, therefore, requires immediate attention and remedial action.

Given this fact, the release of the new iPhone 11 from Apple is not counted as an emergency. Please don't blur the line between A Need and A Want! I am not discouraging you though to buy if you can afford it, just don't go into debt.

When Do You Use an Emergency Fund?

Below are just some examples:

Home Repair - your roof was blown away by a sudden gust of wind. It will not repair itself without involving money.

Vehicle Maintenance - your car failed you in the middle of an expressway. Towing services is not for free.

Sickness - a common cough/cold if not treated early can cause complications. This can lead to a hospital visit, which can cost you money. Even if you visit a government hospital, you will still shell out some amount.

School Expenses - Both Private and Public schools are very good at creating situations where students need to spend money.

Unemployment - the era of job security is long gone. If your company is in a crisis, it will always resort to lay-offs to balance the books. You need money of course to survive while looking for another form of employment.

Opportunities - you are suddenly required to undergo a 3 month training abroad to prepare you for your new role as CEO.

How Do You Build an Emergency Fund?

Always remember the Savings Formula (Expenses = Income - Savings)
Establish the Emergency Fund Amount. It can be one of the following: Three or Six Months worth of your salary or Three or Six Months worth of your expenses.
Establish the savings percentage. Start allocating 10% of your salary for your emergency fund. You can gradually increase the percentage once you are comfortable.
Be Patient, Consistent, and Faithful on your routine. You may think that 10% is a small amount and will take a long time to accomplish. Don't falter, always look at the positive side of things. Once you get into the habit of saving, you will just be surprised that you've already reached or surpassed your goal.

Where to put your emergency fund?

Since this is an emergency fund, you should put the money in an instrument that is easy to liquidate. Meaning, you can pull the money easily and with just a minimum fee. Banks offer a wide variety of accounts that cater this need. Look for a High Interest, Low Risk, and with no/minimum lock-in period instrument.

Building an emergency fund is the first step to Financial Freedom. You will be saving yourself the trouble of going into debt because of unplanned expenses.

“Prepare for the worst and you can expect the best”

- The Affluent Perspective by Ælfræd "Elf Counsel"