As a money coach, the first step towards effective financial planning that I recommend to my clients is to establish an emergency fund. An emergency fund is a specific sum of money that is set aside in preparation for unexpected expenditures or interruptions to regular income. It serves as a financial buffer that can help you weather any storm that may blow up in your life, even one related to money.

The question that has to be answered is why having an emergency fund is really necessary. The following are some of the reasons:

1.      It helps you avoid getting into debt which is something many individuals do when faced with unforeseen costs; they turn to loans or credit cards. This can quickly lead to debt, which can be difficult to pay off if left unchecked. Having money set aside in an emergency fund can help you avoid this situation by giving you access to the funds you need to pay unexpected costs.

2.      It protects your other savings If you do not have an emergency fund, you may be tempted to utilise your other resources, such as retirement funds or investment portfolios. However, having an emergency fund protects your other savings from being used in this manner. Your long-term financial goals could suffer as a result of this. You can protect your other savings by establishing an emergency fund, which will provide you with a separate pool of money to use for unanticipated needs.

3.      It enables you to get ready for the unexpected which is helpful because life can be unpredictable and costs might crop up at any time. You will have the financial flexibility you need to face any obstacles that come your way if you have an emergency fund to fall back on. This money will provide you with peace of mind.

 

How much money should you put away at this point?

It is highly recommended that you have an emergency fund that covers at least three to six months' worth of living expenses. This ought to be sufficient to cover the majority of unforeseen expenditures or interruptions to one's income. On the other hand, some individuals might feel better at ease with a larger emergency fund, such as one that covers their living needs for an entire year.

Keep in mind that the amount of money you set aside for unexpected expenses should be proportional to your specific situation. It's possible that you'll need to put away more money if, for example, you support a family or work in a field that has a greater rate of unemployment.

Where should you keep your money in case of an emergency? It is in your best interest to put your emergency savings in a bank account where they are kept liquid for easier access. Because of its minimal barriers to entry and limited potential for loss, a traditional savings account is an ideal option. A savings account that offers a higher interest rate is another option that might assist you in growing your emergency fund over time. Simply make sure that the account is not difficult to access and does not charge any fees or penalties for withdrawals.

 

The question now is, how can you begin to build up your emergency fund?

The following are some suggestions that will assist you in getting started.

1.      Determine how much money you need to save, then make a goal for yourself on how much money you want to save. This will help you stay motivated and focused on the task at hand.

2.      Establish a spending plan – go through your monthly spending and look for places where you may make reductions to save more money.

3.      Automate your savings by setting up recurring transfers from your checking account to your savings account for unexpected expenses. This will make saving money second nature.

4.      Make use of windfalls – If you are fortunate enough to earn a bonus at work or a tax refund, put a portion of those funds toward building up your emergency fund.

5.      Try to avoid spending money from your emergency fund on things that aren't actual emergencies – use the money in your emergency fund just for situations that truly qualify as an emergency, such as an unexpectedly high medical bill or the loss of your job.

There are a lot of people that don't have any kind of backup plan and this can be very risky. You may save yourself a lot of effort and safeguard yourself against unanticipated events by making the creation of an emergency fund the primary focus of your personal financial planning. Get some much-needed piece of advice and begin to develop an emergency fund as soon as possible.

 

Luca Caruana is a Certified Money Coach (CMC®) and founder of the Money Coaching HubTop of Form