Creating and Growing an Emergency Fund (Part 2)
Managing an emergency fund requires great discipline. Before setting up an emergency fund, there is the need to set goals on how and when the fund shall be used. The fund must only be used in emergency situations. The following steps serve as a guide to establishing and growing an emergency fund;
- Start small: For most people, the thought of setting aside funds to cater for three to six months of living expenses can be daunting. The right approach is to break down the process, start by saving a small portion of your earning and increase gradually. Build up one month of expenses in the account and gradually increase to two months and three months.
- Chose an investment option: The objective of setting up an emergency fund should guide in selecting where the funds are kept. The fund should easily be accessible and should not lose value. Emergency fund can be saved using multiple investment options. Speak to an investment advisor if you need advice on the options suitable for you.
- Automate Contributions: When you start an emergency fund, it is important to decide the proportion of monthly income to be paid directly into the fund. You can instruct employers to deduct the amount directly at source and pay into your emergency fund account. You can also set a direct debit on a bank account to automatically transfer funds to your emergency fund.
- Gradually Increase Contributions: It is advisable to begin small when starting an emergency fund. This is to ensure you are not initially overwhelmed. However, after contribution to the fund for more than six months, you can make a small amount of increment Also when there is a salary increment, an increment can be made to contributions to the fund. Additionally, one time contribution can be made in case of bonus and other one time payments
In utilizing the emergency fund, set some guidelines for what constitutes an emergency and stay consistent since not every unexpected expense can be termed emergency. However, don’t be afraid to use it if you need it. If you spend part of your emergency, work to rebuild it.
Think of an emergency fund as financial backup for you and your family in case something unplanned happens. The primary investment objective should be conservation of principal. By starting an emergency fund now, you can avoid serious financial problems in future. Talk to Nimed Capital Limited for advice on how to start an emergency fund.