An emergency fund is something all of us would love to have so you can be prepared for whatever may happen. Many of us may have experienced such a sudden emergency where you need to have the cash right now.
This is within reach of every person that makes a living from earning a monthly salary or a weekly wage. If you are one of those who just make it every month, you are not alone, but an emergency fund is not out of your reach.
Keep on reading if you want to know how to start an emergency fund with just $500 to begin with.
Steps To Start an Emergency Fund
There are a few things you need to keep in mind when you are ready to start an emergency fund.
No Minimum
It is true that there is no minimum when it comes to the amount you need to start an emergency fund with. Some will say that you must start with the highest amount you can afford and build on that.
This is good advice, but that is sometimes not the right strategy to follow to start your emergency fund. Keep in mind that you are used to that amount of money that is available for spending every month.
So the best way to begin is to start with a small amount of only $500 until you are used to saving that amount. This will help you to start with any amount that is comfortable for you to live without and still stay inside your budget.
Set a Goal
Your goal should be to have enough money in your emergency fund that will be equal to at least 6 months of your monthly income. It is also good to start with a lower goal of, say, a minimum of 3 months worth of your monthly salary.
When you buy a car, you are prepared to pay for 36 months to get it fully paid, and you should approach this fund the same way. Set a long term goal and determine how long you should pay into this fund for it to be ready.
The ideal should be to get the emergency fund up to date as quickly as possible so you can have it ready. But if you start with as little as $500, it will take longer, and you will be sure it is underway.
The Purpose of an Emergency Fund
This emergency fund should be a separate fund from your normal breakdown fund for when the car breaks down. This is an emergency fund for when you may lose your job or in case of an emergency where you will be unfit to work.
Or you can make it part of the normal emergency fund and just add an amount to the total in case of breakdowns. It should not be part of the holiday fund or the kid’s school funds or any of the typical expenses you may have during a year.
An emergency fund should be a fund that includes all the expenses you have on a monthly basis you cannot go without. This will include rent, utilities, and daily food, as well as maintenance and fuel for your vehicle.
The Best Way to Build It
The best way to build this fund is to open a separate account and set automatic recurring transfers so you can forget about it. This way, you will have the certainty that it will reach the eventual goal you have set.
It is much safer if you do not need to transfer the money yourself every month into an emergency account. This way, you will not get tempted to use the money and make promises to yourself that you will catch up at a later stage.
Another thing you want to do is to keep this emergency account completely separate from any day to day accounts. You should not be able to easily access the money, so you cannot be tempted to use this money.
Try to make this money an investment where you can earn interest but still will be able to access it if an emergency does occur. A short-term investment savings account should be the ideal option to go for so the money can earn interest for you.
To reach your goal faster, add all extra money you may have, such as bonuses or even tax returns, to this emergency fund. You can even add all the leftover money from your budget added to the emergency fund to add to your peace of mind.
Be flexible when it comes to your emergency fund; when your income increases, allocate more money to the emergency fund. If the opposite happens and you earn less, cut out other expenses rather than lowering the monthly contribution to the emergency fund.
What are the Benefits of an Emergency Fund?
There are a number of benefits an emergency fund will have for you. Here is a list of only a few of them.
- The first real benefit is the peace of mind you will have; this means much less stress.
- Financial independence is also a great benefit to have.
- It will also teach you to properly manage your finances so you can stay inside your budget.
- You can earn interest on your emergency money.
- Every bit helps, so you do not need to make very payments.
- It is a safeguard against the loss of income.
- It will help to cover unexpected expenses.
- You will be able to make better financial decisions because you are less stressed when an emergency strikes.
- It will benefit your disability policy while you wait for it to payout.
Summary
It is not really that difficult to have an emergency fund; you just need to discipline yourself and take a good look at your finances. Looking at the benefits of an emergency fund, you can see that it is better to have one at your disposal.
So, if you do not have one yet, do yourself and your family this huge favor and start one. It can only improve your life.