A majority of people nowadays opt to work remotely like a freelancers. It might seem like an attractive way to work. But this too has its cons. Any freelancing work or being a digital nomad has a catch; that is an assurance of work or a steady flow of income. The solution is an- Emergency fund or a safety net for emergencies. This means that you have a certain amount, usually 3-6 months worth of household expenses saved up for emergencies.
How do you make one? Here are a few tips that will help you build your emergency fund.
Budget Your Expenses & Predict Future Expenses
The first step to be taken in building an emergency fund is to keep track of monthly expenses. It varies from individual to individual; this expense varies with the number of people that depend on you and if you are supporting yourself. Some reparations are necessary. For example, loans and groceries and expenditures cannot be avoided. We live in uncertain times in an unstable economy; it has become crucial to prepare for all viable situations. When it comes to freelancers and digital nomads, job security has become a thing of the past, and workflow can stop anytime, at the worst time possible. This is one of the most critical limitations of the gig economy. The global pandemic has taught this a problematic way. It is essential to watch out for all possible scenarios that can arise at any point in life.
Break Down Your Savings Goal into Smaller Steps
It is impossible to create an emergency fund in a single day. It will happen gradually over months, and as they say, Rome was not built in a day. Treat a saving fund as a recurring bill, have a goal. For example, if the goal is to raise two lakhs for an emergency fund. To achieve it, make a smaller goal, possibly 10-15 thousand in a month, do not make cutbacks on the necessary things, rather forgo a vacation or eat at home rather than going out frequently for meals. Make achievable goals. Once the first goal is achieved, next set a higher amount and keep increasing it while moving ahead move ahead. Smaller goals propel towards the larger ones.
Create a Separate Emergency Savings Account
One of the easiest ways to save money is not to touch it, lock it away and throw the key but keep one in case of emergencies. Set up a separate account just for the emergency funds. Use a savings account that cannot be dipped into quickly. Preferably stash it separately from the bank that is usually dealt with, do not lump it with an account that is frequently used or link it with an ATM card; this will come in handy whenever there is a temptation to make withdrawals. Studies show that 63% of people with an emergency fund keep the fund separate from their checking and banking accounts.
Automated Deposits for Your Savings Account
Automate the funds to deposit them into the specific account directly. Frequent checking and obsessing over the amount will only make create restlessness. The money will seem slower and lower. The mantra is to set it up and forget it. If you can’t see the money, you cannot spend it. Keep adding to it, whenever there is unexpected money, add the extra padding to the emergency fund. The extra money will only bolster the emergency fund.
Emergency Savings means for Emergency
It is called an emergency fund for a reason, for the emergency fund to grow; make sure that it is used only in the case of an actual emergency. Once there is a considerable egg nest, that does not mean that you splurge it on a vacation or an expensive TV; they are not an “emergency”. In case of an emergency, the fancy holiday taken to Hawaii will not pay the unexpected expenses; the emergency fund will. If there is a need for an expensive phone or TV or a vacation, save up for it, different from the emergency fund. It is meant for emergencies, dipping frequently in it will only help in sabotaging the plans.
Develop Good Financial Habits
The first step to take in the right financial direction is to have good financial habits. That starts from saving; the more you save, the larger safe nest you will have. This will, towards the end, lead to better retirement plans and a more financially stable life. The three things to keep in mind while building an emergency fund is-
- Security- What are the risks that are taken while starting your emergency fund. How safe the money or asset is.
- Accessibility– In case of emergencies, how soon is it possible to access the money matters. Entrust the money where it is convenient to access.
- Liquidity- How quickly can the asset be converted into cash.
A safe thing to practise is to keep the money safe is in various places. Invest the money in a mutual fund. Keep some money in liquid cash and place some amount as bank deposits.
An emergency fund is a reliable safety net. In case of an unexpected expense, this fund will come in handy. This can make a difference if you drown in debt or have smooth sailing through tough financial times easily with little stress. Use this emergency fund only in the case of an emergency. The more you take out of it, the harder it will take to replenish it. Start saving as soon as possible and save wherever possible.