Shit happens, and that’s why we always have a back-up plan in the kitchen (I will also teach you how to be a great cook, but that’s another topic).
In life, shit happens too. Therefore, building an emergency fund is second to none in building personal wealth.
After I paid off my debts, I immediately opened a savings account to save for an emergency fund. To calculate your emergency fund, take your absolute monthly expenses and multiply it by however many months you wish to have saved.
I generally try and keep 6 months of emergency fund. However, shit happens. Therefore, I fluctuate between having 3 to 6 months of emergency fund in my savings account.
An emergency fund is meant for emergency. Therefore, the money is meant to be kept and grow at the most conservative rate. Currently, most of the savings account have 0.1% ~ 0.5% annual rate of return, which is almost nothing. However, money tucked away in a savings account will give you peace of mind if anything unexpected were to happen in your life.
Here are ways to build your emergency fund:
1. Start small by skipping things you don’t need, like eating out less oftenÂ
I cut down on alcohol consumption and stopped taking taxis or uber (unless it was absolutely necessary)
2. Cut back on the cash in your no-interest checking account. If you typically have any money leftover after paying off your bills, put those money into a high-yield saving account
I automate a certain amount of cash to be transferred into my savings account according to my plan
3. Treat your emergency fund as a bill that you have to pay every month and automate the transfer of the fund
I automate a certain amount of cash to be transferred into my savings account according to my plan
4. Stop using credit card until you could pay it off entirely
I only used a credit card to pay my utilities and phone bill until I could consistently pay off a good chunk of my debts, and then I’d use it for entertainment occasionally.
5. Put your tax refund into your emergency account immediately
I actually used my tax refund to pay off my credit card debts.
6. Audit your expenses regularly to see if you need to increase your emergency fund
I track my expenses weekly, and it’s a routine before I make any “fun” purchases.