Great! You’ve set up a budget, and you already know how much you are spending on things. Now you are even successfully sticking to your budget. Many people do spend all the salaries and wages that they get. What they forget are the emergencies that may arise at any time of the day. What happens in case you are laid off, or an appliance suddenly breaks, or any of so many other emergencies occur? The answer is that you need an emergency fund.
How much to put in?
How much money you should put into your emergency fund depends on your financial circumstances. The higher your overhead costs like mortgage and utilities, the more money you need in your emergency fund. The greatest emergency for which there is no insurance is a loss of income. Many licensed moneylenders do suggest that you have available enough cash (including disability or unemployment payments) to cover all your living expenses for at least three months, some advisers suggest having as much as nine months worth of living expenses cash on hand. And of course, it is an ongoing process. If you use your emergency funds, you must replenish them as soon as possible to be ready for any future unexpected expenses.
Emergency fund can assist you to avoid borrowing personal loan in future when you need cash urgently. Many institutions usually charges high interest when he/she gives a loan to you. Emergency fund can also assist in catering the needs of your descendants in case you die. It is not easy to get a good Samaritan to cater for your family needs. Your family cannot struggle so much if you have saved some funds. In families, the tighter your budget, the more you need an emergency fund. A tight budget is simply not able to cover even minor emergencies. What happens if the car breaks down and you miss a day’s work because you can’t get there? Then, not only will you have to pay the garage to fix the car, but you will also have missed a day of work, and the income that comes along with it. Having an emergency fund would allow you take a taxi to work, or rent a car for the time yours is in the shop. Don’t make this mistake. You might think that having a credit card from is a good enough plan for dealing with emergencies, but the financial help a credit card provides is short lived. A credit card can get you out of trouble in the short term, but how will you repay it? Unless you have an emergency fund, the that you will need to use in case of emergencies will come from some other area of the budget, like food.
How to save on your emergency fund
Know your monthly income. This is the first step in building your emergency fund. Whether you are a self-employed or a working individual, you need to know your monthly income. To know how much you are spending, you need to know how much you are making each month. Put all the sources of your income at one place and add up. Include all the sources of income including your salary, your spouse’s salary (if you are married), rents, and interest from your savings account.
Make a list of all expenses
After getting a clear idea of your monthly income, you need to track all your expenses and put them in place. This can be done by tracking every expense you make. Classify all your expenses into different categories, so that it becomes easy for you to know where you are spending the most.
• Food expenses – money spent on milk, groceries, oil, etc.
• Utility expenses – utilities like electricity, water, gas, phone, television cable, etc.
• Education – monthly fees, bills of extra books purchased, tuition fees, etc.
• Clothing – laundry, clothes purchased, etc.
• Housing expenses – house rent, furniture, etc.
• Travel expenses – car maintenance cost, gas and oil bills, car insurance, license, and taxes, etc.
• Medical/health expenses – insurance, monthly check-up bills, monthly medicine costs, etc.
• Contingency expenses – hospitalization expenses, vehicle repairs, home repairs, etc.
• Entertainment expenses – restaurant bills, gifts, etc.
• Other fixed expenses – loan payments, credit card payments, etc.
The above mentioned categories are generic, and the number and types of categories vary from person to person. One thing you need to remember is to track even a small expense – it may affect your savings.
Prioritize your spending
After tracking all your expenses, prioritize them as necessary and discretionary expenses.
• Necessary expenses: These expenses are made based on your basic needs and requirements and hence, these are also called living expenses. For example, the money you spend on groceries, utilities, insurance, medicines, transportation, debt payments, etc.
• Discretionary expenses: If you have made any expense based on your ‘wants’ rather than ‘needs’, then such an expense is called discretionary expense. These expenses are not necessary for your survival. For example, the money you spend on vacations, eating out, cosmetics, birthday gifts, luxury clothing, etc. These expenses are completely for entertainment and recreational purposes.
This step is very crucial because it lets you know your spending behavior – whether you have made necessary expenses or unnecessary expenses. Reduce unnecessary expenses to save some money for emergency needs.
Calculate surplus or deficit
Now, you need to add up all the expenses that come under living expense category and all expenses that come under discretionary expense category. Subtract these two types of expenses from your income. If the amount is a negative value, then you are in deficit. If the amount is a positive value, then you have generated some surplus, which can be used for savings.
Creating your budget plan according to your needs is better than downloading budgeting software. You can use spreadsheet to create one. Living without a budget is like driving a car towards an unknown destination. A clear budget will help you attain financial stability. You can visit the nearby moneylender who can assist you in creating a good budget and stick to it.
Open a high-interest savings account
Keeping track of what you save is a lot easier if you keep your savings separate from your spending money. High-interest savings accounts with a moneylender will help you achieve your savings goals quicker than if you were to leave the money in your cheque account. Visit a moneylender today and you will get an opportunity of creating an account that will assist in saving money for future expenses.