Top 10 ways to build your emergency fund
Emergency funds are important. But, how much is enough? And how do you find the spare cash to stow away into your emergency fund?
How much is enough?
A good rule of thumb to follow is 8 weeks living expenses.
There are various theories around about how much is the “sweet spot” for an emergency fund. And, like all financial affairs it is going to always come back to your individual circumstances. If you are into simple living and frugality then perhaps 6 weeks living expenses may be okay for you. But, if you enjoy the good things in life and your life is more about the style which you live it, then perhaps you might need 10-12 weeks up your sleeve.
Some people, who know about finance, suggest you need 3-6 months savings. But, I would suggest to you that you really only need that amount in your emergency fund if you are trying to get through without income protection/continuation insurance. You need to be able to cover the number of weeks you have set as your waiting period.
I will just point out here that I do not recommend using an emergency fund to cover living expenses between jobs. You should save for that separately.
How to save for an emergency fund?
1. Bonuses
First off we have the quick and painless ways to build your emergency fund. But, it still takes discipline. You have to sacrifice the new toy for the emergency fund insurance money you are stashing away. Bonuses are great for emergency funds, sometimes they can create the emergency fund completely all at once.
2. Tax refund
Tax refunds are another great lump sum source of cash that you can put away, which gives you a big injection into your fund all at once. But, again it is sometimes hard to make that sacrifice, so it is worth considering your mindset around this, if that is the way you are feeling. You want to be developing the attitude that delights in making smart financial moves, like establishing an emergency fund, if you want to be successful with your personal finance.
3. 2nd job
Now we are starting to get into the “taking your medicine” part of the post. This is a great way to get some extra cash for a new investment option or a needed type of insurance, like your emergency fund.
The keys to making a 2nd job work are:
1. Set time constraints - Make a definite commitment to working at it for 3 months, so you know when you have reached your goal.
2. Set financial constraints - Same as time. The idea is so that you know when you have reached the finish line. This helps you stay focussed on your goal, helps you keep going back to the second job when you are tired and just feel like watching the baseball.
4. Own business
This to me is the “sweet spot”. To me, the best option for generating additional income which you can then use to round out your personal finance goals and strategy is “being more entrepreneurial”. It is always easier to put time and energy into a 2nd job when you are working for yourself. And even more so where there is potential for that additional income stream to grow.
5. Spare change
This is the perfection of frugality. And the key is that it really works. Change jars are great. And if you use them you will put together a tidy sum every calendar year that, while perhaps not being able to meet the full commitment you need for your emergency fund, can still total in the $100s.
6. 2nd hand sales
Another tips in the entrepreneurial spirit. All of us. And especially those with families living in the “burbs” will invariably have a veritable treasure trove of 2nd hand goodies hiding in garages, back sheds and storage cupboards. And now with ebay it is easy to turn those items into cash for your emergency fund.
7. Rent spare room
The kids grow up. You are not ready to move into something smaller. Maybe never will. You can monetize the space in your house by renting out rooms. Good options are students, if you live near colleges. (just make sure you interview well before hand)
8. Control your credit card
If you have credit card debt, then one of the quickest ways to find extra cash in you monthly budget is to stop spending on the card, consolidate the debt onto a 0% on balances card, and make you monthly payment every month without fail.
9. Holidays
Two tips here:
1. Work in your holidays. Perhaps the ULTIMATE “taking your medicine” piece of advice. But, a very real way of getting yourself 4 weeks extra cash. You might only have to sacrifice one years holidays to completely fill your emergency fund.
2. Slightly less painful, is to cash in your holidays. Not every work place offers this as a “perk” (and I write “perk” with an keen sense of irony). But if yours does then this is also an easy way to find a few extra dollars for the emergency fund. Maybe do not cash 4 weeks in, maybe just 2. Everybody needs a break to stay motivated.
10. See it as a bill
I think this is most pragmatic approach. If you see your emergency fund as a bill, every more than that, as an insurance bill, you may be more inclined to pay money into it each month. It is a mind set thing, just like everything else in successful personal finance.
With the right attitude and the right information, anyone can be wealthy. (Anyone in a developed country..)
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