What is an emergency fund?
The emergency fund is your mattress against unforeseen events. It is money that you will use to cover unbudgeted expenses that may arise on a day-to-day basis. For this reason, the main characteristic of an emergency fund is that you can recover the money quickly and that it is safe. For example, an investment fund will never be a good destination for this money for unexpected expenses since liquidity is not always immediate, and you can lose money no matter how conservative.
The life of Stan and Eli at the beginning of Up is an excellent example of what an emergency fund is and its uses.
Nor should you mix your contingency cushion with the rest of the savings and investments.
The objective of the emergency fund is to face unbudgeted expenses. In other words, paying for vacations or changing cars would not enter at this point. However, a car repair you did not have planned would. In other words, you should use it only for emergencies, not for whims or avoidable expenses.
Crisis reserves make budgetary support that can keep you above water in a period of scarcity without depending on charge cards or taking out high-intrigue credits. It very well may be particularly critical to have a just-in-case account if you have an obligation since it can assist you with abstaining from getting more.
Do you need an emergency fund?
The answer is affirmative. In reality, everyone needs it, regardless of the income. A contingency cushion is an essential and handy financial tool. Avoid falling into these traps with your money; it would be best to get on in place immediately.
When you have money for contingencies, you do not have to ask for a loan to cover them. Debt has dangers beyond the interest you will pay, and even the 0% loans hide traps that you should know. But if there is a type of financing that you should avoid, this is the credit card, especially if you have it in revolving mode and you do not know it.
Stop saving and do not take advantage of your money. If you save but do not have an emergency fund, you will have to change how you do it every time an unexpected event arises. Start saving is one thing that costs more, and stop doing so to address an unforeseen event that can make it difficult for you to start up again. Automating your savings can help you avoid it.
In addition, an emergency fund will provide you with something more, a guarantee that you can endure any eventuality. This tranquility is much more valuable than you think.
How to create your emergency fund step by step
Now that you are clear about why it is vital to have a mattress against unforeseen circumstances, it is time to get down to work. How can you create yours?
The reality is that you only need one action to start creating your mattress in case of unforeseen events: pre-saving.
You can start creating your financial cushion automatically:
Step 1: Choose the amount you want to pre-save every month at the beginning of the month for your emergency fund. If you have doubts and prefer a personal guide, you have to sign up for this link’s free Financial Freedom course.
Step 2: Order a periodic transfer at the beginning of the month from the account where you receive the payroll to a different one.
Step 3: See how to create your emergency fund and reach the amount you choose.
If you want, you can complete these pre-savings with a saving challenge to make the process more fun. Here you can see the Savings Challenges that work best.
Once you reach the money for emergencies that you are comfortable with, it will be time to move on to the next point in your financial path: use the three blocks of financial planning to take advantage of your money.
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