Preparing for Life's Unexpected Expenses: Building an Emergency Fund

Life emergencies can happen anytime, so preparing for them can give you that extra peace of mind. A great way to do this is to build an emergency fund. 

An emergency fund is money set aside to deal with unexpected emergencies. For example, a sudden health crisis may be difficult if you have little savings. 

You may end up selling your stocks or liquidating other investments for considerably less than you’d hoped or didn’t plan to sell. This is why an emergency fund is an important aspect of wealth building.  

Benefits of an emergency fund 

• Peace of mind 

Knowing where to easily access money to solve an emergency puts you at rest and in a better frame of mind to resolve life emergencies when they happen.  

You’re not calling your stock broker to quickly liquidate your positions, or looking for what property to sell. You can carefully resolve the emergency and get back to normalcy as fast as possible. 

• Keeps you debt-free

With an emergency fund, you can avoid debt by avoiding funding sources like high-interest loans from loan sharks. This is especially important to have a robust emergency fund that can cater to pressing matters. 

• Build a saving culture 

Building an emergency fund means you have to save money over some time. This can boost your saving habit which can spill into other aspects of your wealth-building journey.

How much should I save in my emergency fund? 

It is a general rule of thumb to save up to three months of living expenses in your emergency fund. In a job loss, for example, you may be able to live on the fund until you secure another job and get back up on your feet. 

However, this rule is not cast in stone. Health emergencies can easily take much more money than available in an emergency fund. But a robust emergency fund means that you get some buffer while you raise more money (if need be). 

You may choose to set your limit for your emergency fund according to your peculiar situation. 

How do I build my emergency fund? 

Building your emergency fund starts with reviewing your current financial state. Go over your living expenses and income for the last few months. Split your expenses into essential and non-essential and note recurring expenditures. 

With this information, you can discover new ways to spend less and then channel the excess to your emergency fund.  

Another alternative is to constantly seek new opportunities to increase your income so you can save more for your emergency fund. Other steps to take when building your emergency fund include: 

• Automate your savings 

Automating your savings is an easy way to build an emergency fund. You want the process to be as seamless and non-obtrusive as possible.  

Work with your local bank or use a mobile app that provides save features. Taking the extra thought away from the saving process means you can save more with less worry and hit your targets faster. 

• Keep the funds accessible 

Your emergency funds should be easily accessible when needed. This is why it is better to have such a fund in place when emergencies arise instead of selling assets and stocks. 

• Keep the funds away from temptation 

I know you may be asking how to keep the funds accessible and away from temptation at the same time.  

At its core an emergency fund should be easy to fund, easy to access but not so easy you can use it to pay for cable TV. 

Should I invest in my emergency fund? 

On a general note, it’s not a great idea to invest your emergency fund even when you’re tempted to do so.  

I know you may feel you can put the money to work by investing it but this can easily backfire with wrong investments. Should the investment fail or significantly lose value, it affects the emergency fund and defeats its whole purpose. 

Another reason is not all investments can be easily liquidated. The paperwork and procedure to exit the investment may increase the time for you to access it which, isn’t the best scenario when emergencies happen. 

One option you can consider, however, is to save your emergency fund in a high-interest savings account. The interest may just be enough to take care of bank charges and other minor expenses.  

The most important thing is you need the money whole, and fast to settle emergencies. 

Final thoughts 

Preparing for life’s unexpected expenses will require you to put some measures in place such as an emergency fund. An emergency fund is money kept aside for dealing with emergencies when they arise. It’s good practice to have an emergency fund and you can start one today by first reviewing your financial state and having a savings plan.