Personal Finance – Building An Emergency Fund

Posted on February 08th, 2010 in Financial Tools, How-To, personal finance

What Is An Emergency Fund?
Emergency Fund should contain not less than 3 months worth of living expenses, preferable 6 months’ expenses. Emergency Fund amount does not mean it should equal to your 3 months salary but it must able to pay the rent or mortgage, pay debt, car payment and buy food in case you are not able to earn money in particular months. Emergency Fund is the resource you can rely to help you sustain a crisis which is unexpected severe.

Tips To Building An Emergency Fund

1) Save More Money
- In emergency period, you need an urgent fund to support your daily expenses. Therefore, you need to save more money whenever there is a chance. Spending smart by cutting some unnecessary expenses or doing some part-time work to earn more money. Save more money when you are still young as you still can afford to do more works and earn extra money. Don’t wait till you closer to retirement age because there’s always uncertain things happen which could affect how much money you have at retirement.

2) Regular Investments
- Set up an automatic investments system which enable bank or investment company to withdraw some portion of your salary directly to the selected investment funds from your bank account each month. This method is similar with EPF (Employees Provident Fund ) which is to provide measure of security for old age retirement to its members. Some insurance plans are specially designed to meet this kind or requirement. Try to consult your financial/ insurance consultant to get more information about Regular Investment.

3) Pay Debt
- Do a balance sheet on the debt that you need to pay every month such as house rental, mortgage, car payment, credit card debt. You should aim to pay off the debt before your retirement if possible because less payment means less strain on your retirement savings. At the same time, you can use extra money to invest in high-interest funds to get better returns. Sometimes, it’s not wise to spend your emergency fund’s money to pay off the debt if the interest of debt is low comparing to the investment with higher return. Therefore, be a smart person to evaluate the situation to get the most benefit from investment.

4) Don’t Follow The Market
- When you invested a lot of money in the share market or funds, you are very concerning about the current market prices and always wanting to gain back profits as fast as possible. Don’t use your emergency fund money to invest in share market if you are not understand the risks of investment. Make a right decision to diversify your investments for your age and risk
tolerance. Don’t make the hurry decision to buy or sell the funds as the market will always bounce back on its own.

5) Avoid Relying On Credit Cards
A common mistake that people always make is to treat Credit Cards as their emergency fund resources. Every month, the credit card holders have to pay credit card debt with interest if they carry the credit card balance. Make sure you spend wisely with your credit cards as it actually can help you to cover for unexpected expenses in a certain critical period. However, you still need to build an Emergency Fund that can cover up to 6 months of living expenses.

Conclusion:
Although it may take you months or years to reach your target – Emergency Saving Fund, but when you starting to save money, you are moving closely to have a adequate emergency fund in the future.