How to Build an Emergency Fund
Do you have an emergency fund? If your answer is ‘Yes’, I would say you’ve really done a great job! Building an emergency fund is very challenging and requires a lot of discipline and sacrifice for most of us. In this post of The Wise Coin, I will share with you the steps I have taken to build an emergency fund. These are the strategies that I have learned from others and have worked for me.
1. Track your monthly expenses
How to track monthly expenses? List down all your expenses on a daily basis for 2 to 3 months. This should include your house rent or amortization, utility bills, groceries, tuition, etc. Low-value expenses such as haircut, snacks, smartphone load should be also be listed.
Tracking your expenses is not an easy task and it looks like a tedious task at first. However, when it is done on a daily basis, this will become a habit and will be just a walk in the park. The best way to track your expenses is to use a budget and expenses tracking app like Money Manager. You may also check this post for setting up Money Manager: How to install and Set Up Money Manager
2. Determine the bare minimum
After tracking your expenses for 2 to 3 months, list all the necessary and living expenses for each month. These are all the expenses that you and your family can’t live without such as those for food, utilities, transportation, education, house rent/ amortization.
In essence, your list should only include the bare minimum – all expenses that provide food, mobility, and roof for you and your family. Don’t include non-essential expenses for going to malls, eating out, buying new gadgets or apparel, etc. Get the average monthly expense which is now the equivalent of 1 month’s worth of the emergency fund.
3. Set goals/ time frame
Once you get the bare minimum, set your goals based on your current financial resources. For example, after tracking your expenses, it became obvious that a big chunk of your money goes to unnecessary expenses that you can now save for your emergency fund.
For example, if the bare minimum is 50,000.00 and unnecessary expense is worth 10,000.00, the number of months that it would take to save for a month’s worth of emergency fund is 5 months. Therefore, if target emergency fund is 3 months (150,000.00), the time frame to complete it will be 15 months (10,000.00 x 15 = 150,000.00).
The actual completion of an emergency fund could be shorter or longer than estimated as we can never predict the future. For example, an emergency happened before your emergency fund is completed. That would definitely delay its completion. However, if bonuses and non-salary income are saved for purposes of having an emergency fund, it could make its completion faster.
4. Save, save and save a lot
It’s amazing that in the process of tracking our expenses, we become aware of the various ways that our money is going down the drain because of unmindful and unnecessary spending.
Have you checked the amount spent on going to malls and eating out? Or buying stuff on impulse from the 13th-month pay you have just received? You won’t believe it but it’s a lot! I, myself, is guilty of this in the past. And tracking my expenses opened my eyes to this financial mistake.