How to manage your money to build an emergency fund
Having a specific amount of money set aside for emergencies definitely eases the burden on a person’s mind, when faced with a calamity.
For better or for worse, money is a very important part of our lives. And a financial emergency has the potential of taking a drastic toll on our psychological and physical health. Emergencies can range from losing one’s phone to losing one’s house in a natural disaster- the intensity varies, but the unexpectedness does not. Having to suddenly make a substantial payment or a source of income drying up are both causes for the alarm bells to start ringing. So, how does one protect against the inevitable and prepare for a financial emergency? The answer is simple- start an emergency fund today!
Having a specific amount of money set aside for emergencies definitely eases the burden on a person’s mind, when faced with a calamity. It is simply one (very significant) thing less to worry about. The important part to remember is that the process of building a financial buffer is a very gradual one. You do not have to create an enormous fund in one month; all you have to do is start small and stay disciplined, in order to comfortably tide over difficulties. Here is a step-by-step guide on how to manage finances and save for hard times:
1. Fix your goal-
The first question one needs to tackle is this- how much do I need to save in order to emerge unscathed from an emergency? While there is no foolproof way of deciding on a number, it is a good idea to figure out one’s monthly expenses to begin with. The goal is to save between three and six months’ worth of expenses (the more the better), making sure that once there is an emergency, you have enough to cover all essential expenses- rent, electricity bill and/or water bill, food and kitchen expenses, any EMIs that are pending, daily expenditures etc. Once you have decided how many months of expenditure you can comfortably save for, that figure becomes the final goal.
In order to make sure you save a decided amount of money every month, it is advisable to make that amount a part of your monthly budget from the very beginning. Yes, you will have to forgo some luxury spending initially, but as the emergency stash starts growing, the restraint will seem worth it. A word of caution, though- don’t forgo making credit card payments in order to stash away emergency cash. The interest to be paid will pile up at an alarming rate and your credit score will go down, making it difficult to take loans in future.
2. Choose the best method-
There are a number of ways to save for emergencies and the simplest one is to open a separate, accessible savings account that you do not use until the need arises. More often than not, banks allow customers to set up automated transfers of a fixed amount of money, every month, from a salary account to another savings account. Once you have worked out your monthly expenses, and decided upon an amount to save, all you need to do is begin transferring the fund automatically. Though extremely easy, this is a low-return option and is more advisable for individuals who have just begun saving.
For higher returns, one can avail of a number of alternative routes of building emergency funds. The saved money can be put into high-liquidity investment options like Money Market Funds which typically give a 7-8% annual return. Most of these options do not have a lock-in period and an individual can deposit and withdraw money at any point in time, with the withdrawals rarely taking more than one business day.
3. Mix it up/Break it down-
Every person has his or her own style and comfort level, and any one financial plan will not work for all. It is absolutely okay to tweak the conventional path to suit oneself, as long as you do have a well-charted out plan. You can break the emergency fund saving down into smaller goals, if you are just starting out and larger figures intimidate you. You could also set a closer milestone, such as six months, to explore your saving behaviour and figure out what works for you before launching upon a longer plan. Getting a friend or family member aboard your savings endeavour can also make it easier to stay on track- letting them remind you about the monthly milestone or indulging in a little celebration together once a goal is achieved. While financial security is a very serious matter, the ultimate goal is a state of emotional wellbeing, and thus it is counterproductive to be unconstructively stressed about the process. Making saving fun and easy for yourself is the best option.
4. Finish big-
Staying disciplined and keeping your aim in view will enable you to reach your savings goal. Of course, it is important to understand that financial planning is not a process that ever ends. But it is possible to achieve a certain goal after which you will need to deprive yourself of fewer luxuries- which is a great incentive for keeping your nose to the grindstone in the beginning. Planning early and diligently will ensure that you do not need to be held hostage by financial emergencies later on.
Happy investing
Source:Moneycontrol.com
Having a specific amount of money set aside for emergencies definitely eases the burden on a person’s mind, when faced with a calamity.
For better or for worse, money is a very important part of our lives. And a financial emergency has the potential of taking a drastic toll on our psychological and physical health. Emergencies can range from losing one’s phone to losing one’s house in a natural disaster- the intensity varies, but the unexpectedness does not. Having to suddenly make a substantial payment or a source of income drying up are both causes for the alarm bells to start ringing. So, how does one protect against the inevitable and prepare for a financial emergency? The answer is simple- start an emergency fund today!
Having a specific amount of money set aside for emergencies definitely eases the burden on a person’s mind, when faced with a calamity. It is simply one (very significant) thing less to worry about. The important part to remember is that the process of building a financial buffer is a very gradual one. You do not have to create an enormous fund in one month; all you have to do is start small and stay disciplined, in order to comfortably tide over difficulties. Here is a step-by-step guide on how to manage finances and save for hard times:
1. Fix your goal-
The first question one needs to tackle is this- how much do I need to save in order to emerge unscathed from an emergency? While there is no foolproof way of deciding on a number, it is a good idea to figure out one’s monthly expenses to begin with. The goal is to save between three and six months’ worth of expenses (the more the better), making sure that once there is an emergency, you have enough to cover all essential expenses- rent, electricity bill and/or water bill, food and kitchen expenses, any EMIs that are pending, daily expenditures etc. Once you have decided how many months of expenditure you can comfortably save for, that figure becomes the final goal.
In order to make sure you save a decided amount of money every month, it is advisable to make that amount a part of your monthly budget from the very beginning. Yes, you will have to forgo some luxury spending initially, but as the emergency stash starts growing, the restraint will seem worth it. A word of caution, though- don’t forgo making credit card payments in order to stash away emergency cash. The interest to be paid will pile up at an alarming rate and your credit score will go down, making it difficult to take loans in future.
2. Choose the best method-
There are a number of ways to save for emergencies and the simplest one is to open a separate, accessible savings account that you do not use until the need arises. More often than not, banks allow customers to set up automated transfers of a fixed amount of money, every month, from a salary account to another savings account. Once you have worked out your monthly expenses, and decided upon an amount to save, all you need to do is begin transferring the fund automatically. Though extremely easy, this is a low-return option and is more advisable for individuals who have just begun saving.
For higher returns, one can avail of a number of alternative routes of building emergency funds. The saved money can be put into high-liquidity investment options like Money Market Funds which typically give a 7-8% annual return. Most of these options do not have a lock-in period and an individual can deposit and withdraw money at any point in time, with the withdrawals rarely taking more than one business day.
3. Mix it up/Break it down-
Every person has his or her own style and comfort level, and any one financial plan will not work for all. It is absolutely okay to tweak the conventional path to suit oneself, as long as you do have a well-charted out plan. You can break the emergency fund saving down into smaller goals, if you are just starting out and larger figures intimidate you. You could also set a closer milestone, such as six months, to explore your saving behaviour and figure out what works for you before launching upon a longer plan. Getting a friend or family member aboard your savings endeavour can also make it easier to stay on track- letting them remind you about the monthly milestone or indulging in a little celebration together once a goal is achieved. While financial security is a very serious matter, the ultimate goal is a state of emotional wellbeing, and thus it is counterproductive to be unconstructively stressed about the process. Making saving fun and easy for yourself is the best option.
4. Finish big-
Staying disciplined and keeping your aim in view will enable you to reach your savings goal. Of course, it is important to understand that financial planning is not a process that ever ends. But it is possible to achieve a certain goal after which you will need to deprive yourself of fewer luxuries- which is a great incentive for keeping your nose to the grindstone in the beginning. Planning early and diligently will ensure that you do not need to be held hostage by financial emergencies later on.
Happy investing
Source:Moneycontrol.com
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