Slideshows | July 30, 2013

How to ... build an emergency fund

Emergency fund, rainy day money – whatever you call it, it is important to have a financial buffer to use when fortunes take a difficult turn.

Experts recommend having between three-to-six months wages easily accessible to use when emergency strikes.
As our What is… explainer notes, the exact amount will vary from person to person, with spending habits, having dependents and levels of insurance all factors that influence the total.

Resist the urge
Our tendency to prefer to spend now rather than save for the future can make it difficult to put money aside to use if unemployment, illness or large, unexpected expenses occur.
But having an emergency fund is an important backbone of being in control of personal finances.
And an emergency fund can be built even as people pay off debt. Our slideshow explains how.

 

1

“Pay yourself first”

The popular personal finance saying “pay yourself first” refers to putting money into saving at the start of the pay cycle, instead of simply seeing what is left just before pay day. It makes saving a priority that is planned. It is a helpful habit to have.

2

Do the budgeting basics

The first step for building an emergency fund is to make a basic budget. This provides a clear view of the amount of money coming in, where it is being spent and how much is leftover.

3

Count fixed and variable costs

The slideshow How to … make a basic budget lays out six steps for making a basic budget. It includes listing fixed expenses (such as mortgage payments, monthly bills and education costs) and variable expenses (food, clothing and other costs that change from month-to-month).

4

What’s essential?

Some variable expenses are "non-essential" – such as cinema tickets or magazine subscriptions – and are some of the easiest to cut when wanting to save more. Those already living frugally might instead need more radical choices (such as living in a smaller house) to make sizable changes.

5

Remember the exceptional

A study detailed here finds we tend to forget to include one-off expenses in our budgets. Consider adding an annual allowance to cover splurges such as expensive birthday gifts, a new computer, a lavish dinner while on holiday.

6

Do the math

Once costs are known, they can be subtracted from income to calculate money left over. Consider putting a portion towards eliminating "bad" debt (such as credit card debt) if you have it and towards building an emergency fund if you don’t have one.

7

Keep going

Once high interest debts are paid off and an emergency buffer is built, keep going. Set new financial goals (such as a retirement fund or mortgage deposit) and make saving a positive habit.

8

Don’t forget to top up

When you do need to dip in to your emergency fund, remember to top it up again for the future. That way, the rainy day buffer will be there when you need it.

BudgetGoal settingProcrastinationEmergency savings

eZonomics team
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