From medical expenses to lay-offs, emergencies are unforeseeable and can be expensive, so it's important to have an emergency fund
19 April 2016| Last updated on 23 May 2017
It’s always the case, we have one of those great weeks, where everything is going smoothly and life is feeling pretty good... but then life, as it works in the way it usually does, decides it’s time for a bad day, and the unexpected emergency happens.
From a medical expense, to car repairs to an unexpected lay-off, emergencies are unforeseeable, and can be expensive, thus, it is important that you have an emergency fund for those rainy days.
Initially, there are two types of emergency funds that you should have; short term and long term.
Your short term emergency funds should cover immediate emergencies, such as water heater damage, house repairs, car repairs and medical emergencies.
This fund should be easily accessible; either stored as cash in a safe at home, or in a debit account that is accompanied with cheques.
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Your long term emergency fund covers large-scale emergencies such as earthquake, fire, job-loss etc.
This fund needs to be accessible, but can also be stored in the form of investments, so long as you have your short-term emergency fund to temporarily cover you until you have access to your long-term fund, should such an emergency occur.
If you’re confused on how you can start saving, we’ve got your answers!
Your long-term emergency fund should be able to cover your expenses for about 6 months.
Calculate your expenses and work out a goal to keep in mind.
While you will be saving money from your income to reach this goal, remember that this fund does not cover luxuries such as vacation, dinning out etc.
If your income is low, you can always start your savings goal in smaller numbers. Instead of trying to save 15% from your salary, you can opt for 10%. Make sure to look at the bigger picture, in twelve months, how much savings would you have in your emergency fund?
While you continue to add money into your account, you will begin to put the pieces together and understand how your emergency fund works.
You can begin to gradually increase the value of your deposit into the emergency fund account, when you are financially able to do so.
Your emergency fund should be easily accessible, but not easy enough to tempt you.
If you are one to be tempted with a debit card, consider creating a psychological barrier for yourself by making a brand new account that should remain only used for deposits.
Keep this card hidden behind all your other cards in your wallet, so you don't see it, thereby, proactively avoiding the tempt to splurge on unnecessary luxuries, using your rainy-day fund.
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Make your savings account as important as your monthly bills.
Just as much as you would deposit money into your phone bill, electricity bill and other expenses, be sure to include your saving fund as a bill.
The fund should be just as much a priority as your other bills.
Make sure that you have balanced out your budget on your expenses, otherwise, you will be withdrawing money from your fund to pay for your other expenses, thus defeating the purpose of this account.
Make sure that you and your family are on the same page
Emergencies can happen any time and anywhere.
This is why your family needs to be on the same page when it comes to your emergency funds.
Consider an emergency that happens while you are out of town- your family needs to be on board and aware of your saving funds should an emergency arise.
Just as police give you a sense of security, having an emergency fund gives you peace of mind. Should an emergency arise, you won’t run around trying to find money, rather the money is securely fastened, waiting for you to take it, and avoiding the pesky uses of loans and credit cards.
Even if the fund does not cover the extent of the emergency, it will still cover a large portion of the expenses, keeping you at more at ease.