How to Build Your Emergency Savings Fund
Few things are worse for your finances than experiencing an emergency that you weren’t prepared for. Whether the emergency is related to health, school, or work purposes, sudden expenses can throw even the most frugal people off their guard. For this reason, it is important that you start and maintain a health emergency savings fund. With the extra bit of cash stashed away, you can make sure that any unexpected costs can be taken care of, without compromising your financial security. To get started on building a reliable emergency savings fund for yourself, follow the guide below as provided by the mortgage professionals at Rex Homes.
1. Establish the Rules
The first step in building a strong emergency savings is determining the necessity of the account. What are these funds allocated for? What are your rules for using this money? You must realize that your emergency savings fund will not function in the same way that a typical savings account would. You should not expect to withdraw any cash from this account regularly. So, once you contribute to this savings fund, you should expect to keep that money away for a long while. These funds are meant for real emergencies, so a part of this first step will be defining what an “emergency” is for you.
Ask yourself the following questions when attempting to set a definition of a reasonable use of your emergency money:
- Was this event unexpected?
- Is it necessary for me to use or withdraw from this savings?
- Is there an urgent need for this money?
2. Determine a Budget
There are a few aspects for which you need to set a budget when establishing an emergency savings fund:
- Monthly contributions
- Minimum to maximum amount of money to be stored in the account
- Limits on withdrawals
You must ensure that you contribute enough money to the account so that it will not be depleted upon a single withdrawal. You don’t want your resources to run dry the first time you have to use them, so you must set a minimum savings threshold. Once this is decided, you can decide on your expectations for monthly contributions.
Additionally, you should also set limits on how much you can pull from the account at once. If the emergency can be covered without your emergency savings, pay for it out of pocket. However, if it is a big-ticket repair or overwhelmingly expensive medical bill, you might need to look into covering the payment through insurance or other means. (This is in opposition to the option of turning to your emergency savings as the sole or primary resource.)
3. Start Contributing to Your Emergency Savings
Now it’s time to put your money where your mouth is! Remember that you don’t have to make large deposits into your account to make progress. You can start small, with payments that are comfortable for you, but don’t drag out your efforts to build a substantial savings for too long. Setting up an automatic payment is a great way to make your contributions consistent and prevent you from getting too lost in worry about budgeting. Start with a goal of saving for six months straight, and continue you efforts from there.
An emergency savings fund is critical to your financial security in times of hardship. To ensure you’re not blindsided by surprise fees and expenses, use this guide to start your savings today.
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