“Saving money is not about being able to buy bigger and better things. It is about being prepared to take care of your family.” -Dave Ramsey
Life is unpredictable. It hits us with something unexpected and more often than not, it is not too kind. Sometimes, all you would need is a paltry amount for repairs around the house, cash to pay the rent of your condo in Makati, other times it can be rather exorbitant, like the medical bills and expenses you would need to defray for a sudden illness. With all these considered, it would be wise to build an emergency fund. You would sleep better knowing that if any fortuitous event does occur, you are already adequately prepared and have a contingency plan. Take a look below for five tips on how to build your emergency fund.
1.) Use it only for emergencies
It is not called emergency fund for nothing. It got its designation for the reason that you should use it only for emergencies and not for any other time. You cannot expect this to grow when you are always needlessly taking out cash for unnecessary expenditures such as a new gadget or a new pair of running shoes. An emergency fund is such because it is only meant to cover unforeseen expenses such as a sudden hospitalization or a house repair. To make sure you are fattening it up, you cannot simply dip into it on impulse should you feel the need to purchase something. Whenever this inclination occurs, just keep in mind that when something dire does occur, you would not want those pair of shoes you or that new phone you bought on a whim a few months ago.
2.) Save first, spend later
An adage regarding finances has sagely stated that it is best to spend what is left after saving instead of saving what is left after spending. An even wiser quote would say do not spend beyond your earnings and not to live within your means, but to live below your means, and you will find how much more you can save. The reality is if you only saved your money after spending it, you would not be able to maximize your monthly earnings and reach a greater potential when it comes to savings. This is because more of your money will be going to your expenses rather than your savings. If you saved first before spending, you would definitely reach or even exceed your monthly savings target.
3.) Take baby steps
Like everything else in life, it is important to start small and work your way up until you finally acquire the habit. It may be difficult to get used to the changes at first, but you would find that making a few small changes such as packing lunch to work, putting your weekly movie nights on hold and having Saturday lunches in instead of dining out would be very rewarding in the long haul. Initially, it may feel more like a curse rather than a blessing, but by taking baby steps such as saving five percent, the impact would not be as great on your expenses. As soon as you get used to the habit, start increasing the amount you save.
4.) Automate your accounts
Considering it can be rather easy to spend money once you have it, it is important to exercise some self-control. An excellent way to do this is by automating your accounts simple because you cannot spend money you do not have. Have your bank immediately transfer money from your payroll account to your savings account each payday. There are short-term investments (such as UITFs and money-market mutual funds) which are more liquid and have no minimum holding period. You can store your emergency fund in these.
5.) Increase your income
Undoubtedly, the swiftest way to save more is to have more money at your disposal. Although this may require a bit more effort and time on your part, you would find that the hard work does pay off. Keep performing well and earn those promotions and pay raises. Use your talent to generate extra funds by doing side jobs or use your extensive network of friends for referrals for a freelancing job–the possibilities are endless.
Building your emergency fund may seem like a cumbersome burden when you first start saving but remember that it serves as you and your family’s safety net. Bear in mind that your emergency fund is not merely an investment, it is an insurance.