Start and build your emergency fund ÔÇô hereÔÇÖs how!
One of the most important fundamentals of good financial planning is to expect the unexpected and build an emergency fund. These funds are necessary to cover any unexpected expenses that may arise, and to ensure you do not fall into debt. Events such as job loss, medical emergencies, or even an incident like a lost phone or a car accident can cause your financial life to spiral out of control. ItÔÇÖs exactly at this time, youÔÇÖll need to have some emergency funds stashed away, which you can rely on without going further into debt. For expats living away from home, itÔÇÖs very important that they maintain this fund, should they need to send money back home for any emergency.
How big should the fund be?
A good rule of thumb is to have enough money to cover you for three to five months. However, since no two emergencies are the same, it is always good to have dual emergency funds: a short-term emergency fund and a long-term emergency fund. The short-term fund will take care of any minor expenses and smaller emergencies. However you need to make sure that this fund is easily accessible at any time.
The long-term fund is for more serious and bigger emergencies and should also be available easily; however this fund can be a part of an investment as well.
But, ultimately, anything is better than nothing, so even if you cannot maintain two funds, make sure you have at least one available ÔÇô however small.
Where should you save the emergency fund?
The best option would be to save the money in a savings account, since it can be easily accessible and will be safe. However, this should be a different account and not connected to the account you use for your daily expenditure.
How to build an emergency account?
The steps you should take to build an emergency account are as follows.
- Set a savings goal first. Choose an amount you are comfortable with to save every month.
- Choose the right savings account. Even better if it is an online-only bank account.
- Deposit any loose change you and all your family members have in a jar. Once itÔÇÖs full, transfer the entire amount to your savings account.
- If you are an expat living away from your family, then send money back home to your savings account, using a reputed bank transfer service.
- Transfer any money that remains in your daily expenditure account at the end of the month to your savings account.
- Make your regular monthly deposits automatic ÔÇô from your checking account to your emergency funds account. This way a certain amount of money will automatically get debited from your checking account (on a specific date) and get transferred to your savings account/emergency fund account.
- Cut back on your unnecessary spending and look out for money leaks in your budget which can be plugged. Then use the saved money to build your fund.
Learn to differentiate between an emergency and a non-emergency expense. Birthday surprises, holidays, getting new fixtures for the car or the house, paying for your insurance etc. are not emergencies. Do not dip into your emergency fund to pay for these. Use your emergency fund wisely.