Rainy day funds are essential because they provide a financial safety net against unexpected expenses or emergencies.
An emergency fund is a separate fund accumulated to be used only in case of an emergency. This fund acts like a safety net during unexpected crises and should be limited to such uses only. In case of an unexpected predicament, it is imperative that we have emergency funds to prevent maxing out our credit cards, taking unnecessary last-minute loans, or liquidating our assets.
Emergency funds are essential for every family, including young working professionals. Having said that, how does one prepare or build an emergency fund?
Let us look at 3 tips for creating emergency funds:
Start small and be consistent: If you have not started building your emergency fund yet, then one tip is to start small. It is advised that when building emergency funds, start setting aside small amounts initially. The goal is to be consistent, and the amount should be tailored according to your income, budget, and expenditure for the month. Once there are regular contributions to this fund, one needs to just focus on making consistent contributions.
Secure your emergency funds in a high-yield savings account: Emergency funds are ideally advised to be allocated to a high-yield savings account. A high-yield savings account gives more interest rates, and this will help the fund compound over time. This variant of savings account also allows for easy withdrawal in case of emergencies.
Allocate surplus income to emergency funds: Tax returns, and bonuses, amongst others are instances of surplus income. Allocating some of these funds to emergency funds will help in strengthening your financial security. It is important to keep in mind that your emergency fund is separate from other expenditures. Also, plan and strategise your emergency investments according to your needs and lifestyle. This investment can increase or change according to your income capacity.
It is crucial to understand that emergency funds are meant to provide a security net for monetary challenges. It is advised to keep a minimum of three to six months of emergency funds in place. Some ways to avoid untoward instances in terms of financial instability is to strictly monitor your expenditure and investments. After every emergency, look ahead to replenish it. The money saved today goes a long way in securing tomorrow.
