Effective Saving Strategies to Build an Emergency Fund in Record Time

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The idea of ‘Saving for the rainy day’ is one that everyone agrees with much like we agree that peanut butter and jelly go well together in a sandwich. However, taking a percentage of our already insufficient income and storing it somehow somewhere for emergencies that may not happen can be considered an extreme sport for many.

A big question people ask about emergency fund savings is, “How much emergency fund should I have?” If you’re expecting an exact figure, then I’m afraid I have nothing for you. But if you were to hit rock-bottom today, your emergency fund savings should be able to sustain your living expenses for 3-6 months.

It’s understandable, building emergency savings is one of the most challenging things to do in life, trust me. Growing up, our parents tried to teach us to develop the habit of saving by making us save up money for ‘important things’ like new shoes, new bags, and new toys. Training wheels to help us master the art of saving money. Fast forward many years later, some of us don’t even have the means to save for a rainy day. If this describes your current ordeal, then we have a solution for you on how to build emergency funds.

What is an emergency fund?

Before we begin, What is an emergency fund? Just as the word ‘emergency’ refers to a situation requiring urgent assistance, an emergency fund is a part of your budget set aside as a financial safety net for unexpected expenses and emergencies.

CHARACTERISTICS OF EMERGENCY FUNDS

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According to a survey by Bankrate.com, about 3 American Adults out of 10 (28 percent) have no emergency savings. “One in four have a rainy day fund, but not enough money to cover three months’ worth of living expenses.” That sounds scary, don’t you think? Imagine waking up one day going about your business, and unluckily you need funds because you suffered an illness or injury, or your car needs major repairs, or you need to make some major household repairs or travel unexpectedly. These are common emergency fund examples, so how do you magically make money appear out of thin air?

Here are some of the characteristics of emergency funds.

It must be readily accessible within a short period of time in the form of cash or cash equivalent. There’s no point saving for emergencies if you can’t acquire the money when an emergency suddenly occurs.
No matter how you choose to save your money, the value of your emergency funds savings must not fluctuate with changes in interest rates or stocks.

Put aside rainy day savings for a minute; many people even struggle to have any kind of savings at all. Emergency funds savings planning strategies indirectly help you to build savings.

WAYS TO SAVE FOR EMERGENCY FUNDS?

When you set up an emergency saving goal its key to use a hands-off approach to quickly realise your emergency savings goal.

Some of these savings planning and emergency planning strategies include:

Setting specific realistic saving goals. Whether you’re saving to pay for your mortgage, a business, a trip or to buy a new car, it’s essential to set realistic saving goals that you can achieve.
Specify the amount of savings needed to finance each goal.
Calculate the monthly payment required to achieve savings amount in a specified period (Amount x 12 months = annual amount required).
Automate biweekly/monthly deposits into the emergency savings account.
Open a high-interest savings account. It should be strictly for emergency savings.
Once you reach the desired saving threshold. Move funds into a higher-interest instrument like GIC or certificate of deposit to earn a little more interest
Add extra cash into the emergency funds account thats been cut from other expenses to speed up meeting your savings goal.
Review your budget regularly

WHERE TO INVEST EMERGENCY FUNDS?

In the States

Money Market Funds. These are mutual funds that invest short term debt instruments. These are liquid funds with the aim to maintain stability in asset values.
Certificate of deposit. Its a secure way to way to invest liquid cash, where funds deposited into a bank account is locked in for a specified amount of time at an agreed interest rate. Generally, rates are higher than a regular interest rate.
High-interest savings accounts.High-interest rate savings account and interest rate is payable at the end of the month.

In Canada

Cashable Guaranteed Investments Certificate(GIC). A typical cashable GIC has a term of 1 year. It can be cashed at any time within the term and your principal is guaranteed. Interest is payable monthly or semiannually or upon maturity.
Cash equivalent funds are conservative investment funds that provide steady income with relatively low risk because your principal is guaranteed. Generally, low risk or safe securities offer low returns. Due to funds being invested in near-cash assets that are pretty conservative that guards against loss of principal.
Open a bank account for high yield/high interest.
Tax Free Savings Account. It has a high-interest savings account component that’s higher than a regular bank account. Funds can be withdrawn from the account at any time without penalty.

HOW TO START SAVING FOR AN EMERGENCY FUND.

Now that you’ve laid out all the background checks and you’re ready to begin saving for the rainy day, we’ve compiled a detailed and comprehensive step-by-step guide to starting an emergency fund savings.

1. Set Realistic Goals. Do you have a saving goal that you hope to achieve someday? Some of these goals should be realistic enough and easily achievable without breaking the bank. We’ve all been there, saving money somewhere but due to one reason or another that doesn’t qualify as an emergency, had to break the bank.

2. Always Remember To Pay Yourself First. A rule of thumb to help you stick to your savings plan is to always pay yourself first when you receive your income. It’s important to treat your savings as a discretionary fixed expense. Immediately you receive your salary, the first transaction you should carry out is moving the fixed percentage of your salary to your savings account.
3. Take Advantage Of Automatic Savings Plan. Take advantage of this feature that allows you to create a savings plan and set up preauthorized deductions of money directly from the paycheck or bank account at a fixed time.

4. Using A Savings-first Approach. While this may seem so difficult to do, using a savings first approach and resisting unnecessary purchases is achievable with a lot of determination. Most importantly, try as much as possible to avoid buying on credit.
5. Reward Yourself. Saving money for an emergency fund, retirement, big-ticket items or a long-awaited vacation is a long and challenging undertaking. So after all that struggle and you eventually exceed your saving goals, you must reward yourself.

6. Get a Side Gig or Side Hustle. These are jobs that you can do alongside your primary job to earn that extra money that you need. So instead of cutting down your important expenses to meet up with your saving goals, why not start a side hustle and earn more money to settle your expenses effortlessly.

7. Cut Expenses. As difficult as it was to type those words, cutting your expenses is an integral part of building emergency funds savings. Nobody wants to cut back on the way they spend money, especially if you’re already used to a lavish lifestyle but it is the backbone of any savings plan.

While making all the effort to save for an emergency, it’s important to remember to use emergency funds for emergencies only. Your emergency fund is not your money stash and should not be used for non-emergency stuff like aimless shopping and going on unnecessary vacations.

WHAT IF YOU DON’T HAVE EMERGENCY FUNDS?

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A popular saying goes thus, “There’s no harm in hoping for the best as long as you’re prepared for the worst.” What could possibly be the worst thing to happen when you’re preparing to build emergency fund savings? DISASTER STRIKING! Imagine an emergency happening right now, and you don’t have a dollar in your emergency savings. What now? Don’t despair, below are options for you to consider.

Home Equity Loan is an Option. Mostly have fixed interest rates and its pretty easy to borrow a big chunk of funds
Get a line of credit. Advantage of a line of credit is you can only borrow what you need and pay interest for the amount you’ve only borrowed
Permanent Life Insurance Policy, where part of the premium paid is set aside in policy as a reserve that may be borrowed against it.
Borrowing from 401k. This is not recommended and should only be done as a last resort because of a negative impact on your retirement assets and lifestyle.

CONCLUSION

There you have it, a detailed guide on how to build emergency savings today. American business magnate, investor, and philanthropist, Warren Buffett once said, “Do not save what is left after spending; instead spend what is left after saving.” Nobody wants to have a severe emergency emerging out of nowhere and feel helpless. Regardless of how little you earn for a living, try as much as possible to develop a saving habit today.

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