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It’s no secret, life is expensive. You need to get a job or start a profitable business to secure stable income. Then you need to spend that income for a roof over your head, food in your belly and health insurance for when you get sick. But what about when an emergency hits? Will we have enough to deal with whatever life throws our way? In this article, we will discuss the importance of an emergency cash fund and how to go about creating one.  

Reasons to Build Your Emergency Fund

Financial emergencies can happen at any time and for people who are otherwise financially responsible and thrifty, a sudden financial emergency can push them into poverty. Unforeseen circumstances like car accidents, sudden sicknesses and even bad weather can bring with them debts and bills which can often put a strain on our personal funds. Having an emergency cash fund set aside for these moments can help protect you, your loved ones and your shared investments.

Furthermore, having an emergency fund will ensure you don’t get penalized for taking an early withdraw from accounts such as your superannuation or federal pension funds. Additionally, having an emergency cash fund ensures you won’t have to sell long-term investments such as stocks and bonds at below their value.

How to Save for Emergencies

Don’t Take on More Debt

If you have outstanding debts, make it your priority to pay them off as quickly as possible to avoid paying more than the original balance due to interest. Without having to pay off debt, you will be better able to build your emergency fund quickly. Furthermore, avoid taking on any more debt as a means to create your emergency fund and if you’re a homeowner, DO NOT borrow against your home’s equity.

This also applies for those who have applied for a loan which can swallow a huge chunk of your income and deny you the chance to establish an emergency fund. As such, you should make repaying your loans as quickly as possible a top priority.

Keep Emergency Cash in a Safe But Easily Accessible Place

We know what you’re thinking, but no, do not hide it in your sock drawer or under the mattress.

Though your emergency cash fund doesn’t necessarily need to be kept in a bank, especially if the account is tied up in investments. They need to be immediately accessible in the event of an emergency, so placing it in a separate savings account with little to no withdrawal limits or stipulations is the way to go. But keep in mind, this account is separate from your other savings accounts.

While you’re there, take the opportunity to automate your finances. Today, you don’t have to settle your bills manually or physically. With financial automation solutions, your bills can be paid as soon as they are due, and as long as money is in your account. And you can also set a certain amount, as little or as much as you want, to transfer into the emergency fund automatically.

How Much Cash Is Recommended?

To begin with, you should set enough aside to cover at least one month’s expenses. However, as time goes and you’ve built your savings, your emergency fund should grow to cover a few month’s expenses or even a year. If you require a more accurate assessment on how to save or are just unsure, a professional financial planner will have a thorough look at your personal finances, find gaps, spot extremes, and in the end, advise you on what you need to do to build your emergency fund.

Budget, Budget, Budget!

Creating a monthly budget is one of the most significant things you can do to help building your emergency cash fund. Keeping a record of all incoming and outgoing expenses can eliminate any financial anxiety and help to keep a frame around your income so that you only use cash for the right reasons.

  • Rent
  • Groceries
  • Household Maintenance
  • Work Wardrobe and Upkeep
  • Subscriptions
  • Travel Expenses
  • Memberships
  • Prescriptions
  • Bank Account Fees
  • Car Registration
  • AND NOW – Emergencies.

Building Emergency Funds While in Debt

As previously mentioned, avoid taking on new debt to build your emergency fund. The importance of an emergency fund, however, can’t be downplayed. If you’re working to reduce the amount of debt you owe but still want to start building your own emergency fund, contact your lenders. Many creditors are willing to work with your current situation and will offer a repayment plan. Alternatively, if you’re ready to settle, many creditors are willing to broker a deal when the balance is paid in full. Furthermore, be mindful of your spending while taking advantage of sales and coupons.

For more information on emergency cash funds, check out the blog and to apply for an emergency loan, click here!

Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.