There is nothing difficult in creating a personal reserve fund in case of an emergency. The emergency fund consists of money set aside for life’s unforeseen circumstances, such as if your car breaks down, you get fired or quarantined. This money can help you cover unexpected expenses or keep your lifestyle as normal as possible under the circumstances.
It also protects you from using credit cards, payday loans, or cash loans. They all have very high interest rates and can lead to an interest-bearing debt spiral. Some micro payday loans have an astronomical annual interest rate of 1440% per annum!
What is a reserve fund?
This is the most important financial goal that absolutely everyone should achieve . It is a set aside and properly distributed amount of money that acts as a buffer between us and the problems of everyday life. It is a protective wall that gives your family financial security and keeps you out of debt. This is a financial safety cushion that helps a lot in any life situation.
The reserve fund is your financial umbrella.
Why create a reserve fund?
Unexpected expenses, job loss, car engine failure, long-term illness requiring the purchase of medicines, a flooded apartment because you do not have property insurance, a broken refrigerator in the middle of summer are just some situations that we cannot predict and that require that we dug deep into the pocket.
Of course, situations like this don’t happen every day. However, since you have an umbrella at home, even if it only rains occasionally. You will also need an emergency fund , although you will use it from time to time. But the insurance fund is not only protection against breakdowns. There are many more benefits that you will fully appreciate only when you create such a fund. Here are some of them:
- Failure doesn’t knock you out . People with savings tend to be more relaxed and seem to be more fortunate. And sometimes it may seem that bad luck fades into the background. But they also lose their jobs, scratch the paint on their cars, and break refrigerators. The difference is that after a few moments of annoyance, they pay for repairs from the reserve fund and forget about it.
What do people without a reserve fund do in such a situation? They run to the bank or microcredit organization and then work hard to pay their dues. The failure of the gearbox immediately turns into a financial crisis.
- You feel more secure and make bolder decisions. I can’t describe how great it is to feel comfortable and safe with money “just in case”. Layoffs at work? Okay, I’ll look for a job elsewhere. Does your boss keep pissing you off? Well, it’s time to change your boss for the best model. Are you bored at work and not progressing? You have savings, so you can look for a more interesting option. And everything is calm, without rush and without stress – so your decisions can be bolder and better.
- You know you can get rich . Because you have been able to set aside your emergency fund, you have irrefutable proof that you can consciously and intelligently manage your money. And if so, then you can achieve more serious financial goals.
- You are the best investor. With a reserve fund, you can safely take care of your investments. You can calmly watch the turmoil in the financial markets and not make emotional decisions, because the reserve fund gives you extra comfort. Moreover, it takes at least a dozen months to allocate the funds that make up the security fund. This will give you time to learn about investing and be better prepared.
How much do you need to save?
Emergencies can range from a few hundred dollars to thousands of dollars, so figuring out how much to keep in the reserve fund is up to you. At the same time, it doesn’t have to be difficult at all.
The traditional advice is to save three to six months of expenses in the reserve fund. This is the amount that will help us survive three to six months in the event of a loss of income. If you are just starting out, this number may seem daunting, but remember, the goal is to build up to this number. Even $10 a week is not bad.
However, to get a real sense of security, this amount can vary greatly. Single people renting a small room will be provided with a sense of security for 3 months. A family with three children paying off a mortgage can feel secure with at least six months of money in the account. Others, for the sake of peace of mind, prefer to have even more funds.
If you feel uneasy about this advice, don’t ignore it anyway! Perhaps you work in a seasonal industry or a job with a high risk of being fired. Or you have children or parents who depend on you financially. In this case, the long-term goal of the reserve fund may be equal to the annual amount of expenses for you.
However, your financial goals must be precise so that you know if you are getting close to them. Therefore, I propose to set your “financial goal” for 6 months and only then decide whether it is worth somehow changing this amount.
Start by opening a separate card or virtual account
No need to get hung up on this step, just start somewhere. If you are confused between opening a card in two banks, you are wondering which card you need to open. Create a virtual card with your online bank or app.
In less than 15 minutes, you can find a bank that will give you competitive debit card rates with no fees and interest on your personal balance, because most banks offer almost the same conditions. Most importantly, immediately give up the credit limit . Just choose any method and start saving.
For the most advanced, you can open a free account in the AdvCash payment system and have several accounts in different currencies at once and convert them among themselves without commissions, as well as buy, exchange and store cryptocurrencies. Transfer funds between users for free.
If it really is that simple, you might be asking, why not just leave the money on your current card? Having a separate card or virtual account creates a mental wall between the money you can spend on your normal daily expenses. And money that you shouldn’t use unless it’s a real emergency.
Break your goal down into smaller steps
Now that you know how much you need to save, set a monthly or biweekly savings goal to save that amount. This will get you into the habit of regularly saving money and also give you a bit of a mental boost every time you add a little more money to your fund.
When it comes to saving money, it’s important to develop habits. If you don’t practice saving at every opportunity, you’ll be tempted to withdraw money from the “emergency” fund for things that aren’t real emergencies.
By breaking down the goal and aligning it with pay cycles, you also get in the habit of paying yourself first . The easiest way to approach this step is to treat your emergency fund like a bill. Include deductions in your budget. And bet on making a payment at least once a month, just like you do for your other accounts. If you treat your fund like an account, you prioritize where your money goes.
How to learn to save money
When you set a monthly goal, choose an affordable, realistic, and consistent contribution amount. Don’t think that you can suddenly save a lot more money just because you made a decision (though that’s important too). Focus on changing money habits to be sustainable.
Even a small amount each week or each month will go a long way towards building an emergency fund while teaching you good money habits and instilling financial discipline in your life.
How to increase your reserve fund
The regular and steady savings you make will form the bulk of your fund, but don’t let your opportunities go to waste. If possible, deposit additional amounts into your savings account. For example, if you:
- received a tax refund
- got a pay raise
- sold something (for example, a car, jewelry, furniture)
- received money as a gift
- received a bonus for good work
- completed the loan
Use the extra money to increase your reserve fund.
You still have to treat yourself (especially if you’re getting money for your birthday), but treat it responsibly. Set your spending to savings ratio. For example, treat yourself to something nice with half the money you received from your birthday present and save the rest.
How to eliminate unnecessary expenses
Think about your current expenses, which you could cut without too much trouble. Analyze your budget or budget by reading the tips and identify your needs and desires.
To avoid unnecessary expenses, you can:
- Make a meal plan for the week
- Eliminate one non-essential item from your shopping list (maybe one of those vegetables that goes missing every week in the fridge or cookies that ruin your figure)
- Spend 5 minutes searching for discount coupons, cashback and special offers before you buy
Depending on your current habits, this could be a decent amount of extra money into your emergency fund.
How not to use the reserve fund?
For many, the funds that make up the security fund represent a huge sum. If someone has not had any savings so far, and now he sees tens or several tens of thousands in his account, he naturally asks himself: What to do with such a sum of money?
Therefore, I would like to emphasize, this is very clear: the insurance fund is not an investment! This is emergency money. Therefore, the resources that make up the security fund must be located in a very secure yet accessible location .
Why not invest that money and look for high returns?
- Because they should be available when needed. If you invest them, for example, in bonds, which will suspend redemption for several months – then what will you do?
- Because their value cannot fall . Since you must use this money as needed, it cannot be less than what you have planned.
- Because they should give you a sense of security and peace of mind, not emotions and restless nights during market turmoil.
You can safely invest more than your reserve fund .
What is not an emergency
Finally, it is very important to be honest with yourself about what constitutes a real emergency . Expenses that occur irregularly or expenses that you might have foreseen are not emergencies.
Let’s look at a couple of examples:
- You’ve had your laptop for 8 years now and even though it’s still working, you’ve noticed that the battery is draining faster and faster every day. A laptop can last you another 2-3 years, or it can stop working at any time. You should set a separate savings goal to replace your laptop and contribute to it continuously. These are predictable expenses, so try not to use your emergency fund.
- You’re making some exciting (and budgeted) upgrades to your home. While in the store, you notice a crazy sale of household appliances that were not planned to be upgraded. If you can use a credit card and pay the balance in full by the end of the month, that might be a good option. If you don’t think you can get a full refund, put off your purchase until you’ve saved enough.
- We saw a burning tour to Turkey or Egypt. This is not an emergency. Rest needs to be planned in advance and postponed for it.
While your contingency fund should be easy to access, it’s important not to let yourself be tempted by that money and leave it untouched in case of a real emergency. On the other hand, when it’s a real emergency, don’t be afraid to use your emergency fund. This is much better than expensive options such as payday loans or cash loans.
The purpose of an emergency fund is to gain peace of mind and avoid resorting to costly financing options.
If you have any questions about the reserve fund – ask in the comments. And share the article with at least one person dear to you so that more financially independent people appear in your environment.
