Budgeting is an essentialmethod of making sure that you’re spending your cash as frugally as possible. When you have a budget, you know how much you need to save, and how much you can spendto ensure that you don’t end up in any financial danger. However, many people don’t understand what a budget is, and how it works to give you more control over your life.
There’s more to building the perfect budget than comparing loans online to ensure that you get the best interest rates or cutting out vouchers before you go to the supermarket. Budgets also ensurethat you’re preparedfor the things you can’t predict in life – that’s why all the best budgets feature an emergency fund.
What is an Emergency Fund?
An emergency fund is a separate part of your budget that doesn’t go into the needs or wants section. It doesn’t pay for any bills or last-minute takeaways. Instead, it’s there to act as a safety net when unexpected costs come your way that you might not have budgeted for before.
For instance, your emergency fund can help you to stay out of trouble if you or your spouse end up losing your job and having to search for a new one. These funds can also pay for things like suddencar repairs, or problems with essentialparts of your home, like a boiler or washing machine.
Having money in an emergency fund account can help to stop you from borrowing money from a credit union or bank. Emergency funds also act as a buffer when you don’t want to tap into all the money that you’ve been saving towards your personal goals. The question is, how do you create an emergency fund?
How Much Should You Save?
The first step in coming up with an emergency fund section in your budgetis figuring out how much you need to save to protect yourself from those unexpected expenses. There’s no one-size-fits-all strategy here, as some people will have their ownidea of the “ideal” amount to give themselves peace of mind. However, most financial advisors suggest saving anywhere up to half a year of expenses towards your emergency fund.
A good rule of thumb is to ensure that you have enough money in your emergency buffer to cover anywhere up to six months if you were to lose your job and have no additional income coming in. This way, if anything went wrong, you wouldn’t have to worry about borrowing money while you waited to find a new job. Of course, you don’t necessarily need to fill your emergency fund to the brim straight away. Starting small with just £500 to get you out of financial scrapes can be enough to take a significant amount of stress off your shoulders.
How to Build an Emergency Fund
Once you’ve decided how much cash you want to save towards emergencies, you’ll need to start putting your money aside. Start by coming up with a monthly savings goal. Thiswill get you into the habit of saving regularly, and it may make the task itself less overwhelming. You might even be able to set your bank account up so that you automatically savea small amount of money each time you get paid.
Another way to boost your emergency fund is to get into the habit of saving your change. Although the occasional pound or fifty pence piece might not seem like much, tobegin with, they can quickly add up to make a hugedifference to your savings account in the long-term. If you’re not getting any change from your purchases, then this could also be a sign that you need to reconsideryour budget and look for places where you can cut down on your expenses.
If you want to build your emergency fund up as quickly as possible, you can also look into finding ways that you can supplement your income with additional work. In the digital world, there are plenty of ways for people to earn more by freelancing and sharing their skills online. As you begin to earnmore cash, you’ll be able to tuck extra money away and potentially reach your savings goals faster.
Whatever you decide to do to develop your emergency savings fund, remember to keep checking back and altering your strategy as and when you need to. For instance, you might decide that you can save more after you get a pay-rise at work.