You should have an emergency fund – this is what you see everywhere. From financial experts to your well-wishers, everybody suggests having an emergency cushion. Many people try to put aside money for a rainy day, but many of you have no idea of the size of idealistic savings should be.
When an unexpected expenditure pops up, you find your savings short of funds. As a result, you end up borrowing more than your affordability. Borrowing is not a bad idea as long as you have some savings to tide over during a financial emergency. Savings can help you avoid paying money as interest.
An emergency fund cannot solve all your money problems, but it can help you head in the right direction.
What is an emergency fund?
As the name suggests, emergency funds aim at helping you during financial emergencies. You cannot use these funds for planned expenses such as buying a laptop. It does not need to be very big, and the size of emergency cushion varies from individual to individual.
What should be the size of an emergency cushion?
Emergency funds act like nurses that cushion the sorrow, but it is not easy to figure out its size. Many people think that the larger the emergency fund, the better it is. It is good to brace yourself for big expenses, but it is not as realistic as it seems because it will take a very long time, and this is quite silly to assume that you will face no emergency until then.
It is natural to dip into these funds whenever an irregular expense comes in your way, which is why they cannot grow too big. Further, the size of these funds also depends on how much you transfer from your monthly income.
Financial experts recommend having three to six months’ worth of living cost as an emergency cushion.
- A person who is a sole breadwinner will have a bigger emergency cushion than those who have the financial support of their family members.
- Try to make it six months’ worth of living expenses. It will help you survive your unemployment days.
How to build your emergency cushion?
Now you have come to know about the ideal size of an emergency cushion. The next step is to build it. Building a rainy-day-fund can take a bit long time, so start with a small amount. Most of the people without realizing how much they should put aside throw a large portion of their income and end up struggling to meet their regular expenses.
If you go overboard, you will get nothing but disappointment. You need to be patient with building your rainy-day funds. The rule of thumb says that you should set aside 10% of your monthly income. However, it depends on the size of your monthly earnings. If you earn a good amount of money, you can extend it up to 20% or more,
Your plan to build emergency funds will be successful only when you have left some money after meeting all of your regular expenses.
- You should create a budget and cut down your unnecessary spending. The more frugal you are, the better it is. You can transfer money to your savings what you whittle down on discretionary expenses.
- Keep tabs on your spending to avoid falling off the track.
It takes a bit of time to create an emergency cushion. However, remember that this cannot solve all your money problems. Despite having funds for a rainy day, you may face cash shortfall, but thankfully, you can take out emergency loans with bad credit from British-lenders.uk in London, United Kingdom.
Sometimes people successfully build emergency funds, but they dip into them to meet their planned expenses. Do not commit this mistake. This is where many of you slip up and blames your low pay.
What if you are living from paycheque to paycheque?
Building an emergency cushion seems to be tough for people who are living from paycheque to paycheque.
Try to have a side gig. More cash inflows will provide you with more flexibility, and you will be able to have some savings.
If you do not have a side gig, evaluate your spending trend and cut back on unnecessary expenses.
It is not set in stone you need to transfer at least 10% of your income. Even a small amount based on your earnings can help you tide over. Saving just £5 will add up to £1,825 a year.
Building an emergency cushion is difficult, but it is not impossible. No matter how much you earn, never underestimate the importance of putting aside money. Take care of the pennies, and the pounds will look after themselves.