We’ve all had unexpected financial emergencies at some point in our lives, such as an accident, an unplanned medical bill, a broken appliance, or even a cell phone that stopped working when we least expected it. The thing is, whether big or small, these unexpected expenses come at the worst times, and that’s why we must find a way to be prepared.
Given this situation, creating an emergency fund is the solution, as it is the best way to protect ourselves and is one of the first steps you can take to start saving. By setting aside money for these unforeseen expenses, even if it is a small amount, you will be able to recover quickly and get back on track to achieving larger savings goals.
What is an emergency fund?
An emergency fund is a cash savings set aside specifically for unexpected expenses or financial emergencies. Common examples include home repairs, medical bills, or an eventual loss of income.
In general, emergency savings can be used to pay for those big or small inconveniences that you suddenly hadn’t planned for and that aren’t part of your normal monthly expenses.
Why do I need an emergency fund?
It is a necessity because without savings, a financial blow, even if it seems small and of little importance, can make you set back on your goals, especially if it ends up becoming a debt since it would have a greater impact on your finances in the medium or long term.
Research shows that people struggling to recover from a financial blow have less savings to protect themselves from a future emergency. They may even turn to credit cards or take out unfavourable loans with high interest rates that become increasingly difficult to repay. Others end up turning to other important savings, such as their severance pay or pension, to cover these expenses, but it is often not enough.
So, this fund allows you to have peace of mind in the event of future situations or eventualities that you definitely did not count on. Remember that an emergency never gives you notice.
How much money should I save to build my emergency fund?
The amount of money you need to have in your emergency fund depends on your specific situation. Thinking about the most common unexpected expenses you’ve had in the past and how much they cost you can help you get an idea of how much you should have set aside.
However, considering that the biggest risk we all face is losing our jobs, which is our main source of income, we should review our monthly expenses and subtract those that could be eliminated or reduced in this situation. For example, cancelling subscriptions to streaming platforms like Netflix or replacing the cell phone plan with a prepaid one.
Once we are clear about what the minimum level of spending we would need for a month would be, we can estimate the size of our emergency fund, which should cover at least 4 expenses, given that this is the average time it would take a person in Colombia to get a new job.
Now, if you live day to day or your income fluctuates each week or month, it may be harder to save money, but not impossible because even a small amount can give you some financial security. Read on to find the savings strategy that best suits you.
How do I build my emergency fund without breaking the bank?
There are different strategies for starting to save, but these depend on you and the different situations that arise. For example, if you have a limited savings capacity or if your salary is unstable, the same plan will not work for you as it would for someone whose income is higher and most of it is used for entertainment.
So, all the strategies we will give you below may be useful, but if you have little savings capacity at the moment, it is important that you manage your cash flow by reducing expenses from now on.
Strategy 1: Build the habit of saving
Building an emergency fund of any size is easier when you’re already in the habit of saving, as that’s one of the quickest ways to see money grow. If you don’t already have a saving habit, there are a few key principles you should learn:
- Set a goal. Setting a goal for your savings can help you stay motivated. In this case, building an emergency fund to protect your pocket against unexpected events can be an achievable goal that helps you stay consistent. Remember that to achieve this, you must include this savings in your budget, and that is why at Tributi, we have a customizable template that you can download for free. Do it now!
- Schedule or automate your contributions. There are several ways to save, and as you will read later, making automatic transfers or creating pockets in your savings account is usually one of the easiest to avoid spending money. If this option is not feasible for you, set aside a specific amount of money each day, week or biweekly, and if you can save more from time to time, you will see how that money grows even faster.
- Keep track of your progress. Find a way to check how your savings plan is going. You can write down your total contributions in your budget or schedule notifications that tell you your savings balance. This is important because keeping track of your progress can be very rewarding and a great incentive to keep going.
- Celebrate your successes. If you build the habit of saving, acknowledge what you have achieved and take credit for it because it is only yours. Every time you achieve a goal, give yourself the opportunity to celebrate by doing something you really enjoy and set your next goal.
Strategy 2: Manage your cash flow well
When we talk about cash flow, we are specifically referring to the moment when money comes in (income) and goes out (expense). When these two actions are not well planned and synchronized, at the end of the month, we find ourselves without a penny in our pocket or in debt. For this reason, it is important to keep track of money, identify what we are spending it on and take corrective actions in time to improve our personal finances and be able to allocate a portion of our income to savings.
On the other hand, if you see that the problem is that you have to pay all the bills at the same time and that in the end you end up with late payment interest because your salary is not in line with those dates, talk to your creditors, such as your landlord or the banks of your credit cards and better organize the due dates of your bills, this way you will be more relaxed and you will be able to allocate part of your money to savings.
Another way to achieve your goals is to set aside money during the weeks when you have fewer financial commitments. This will make it easier for you to save.
Strategy 3: Take advantage of savings opportunities that arise
We all have certain times when we receive more money, whether it is from a bonus, an extra job or our birthday. Take advantage of those moments to save some of the money and move faster towards building your emergency fund.
Who should implement this strategy?: Everyone, especially those with irregular income. So, if you receive money on special occasions, it’s always a good idea to consider setting aside a portion to save.
Strategy 4: Automate your savings
Scheduling savings is one of the most efficient ways to build your emergency fund without falling into temptations that slow you down or make you go backwards. So, set up an automatic transfer now to deposit the money into your savings account, checking account or whatever pocket you have set aside for that purpose.
You decide how much and how often you save, so once you’ve set it up, you’ll be one step closer to reaching your goal without interruptions. Now, if your financial situation changes for any reason, you can always increase or decrease your contribution. If you prefer to be informed every time the money is debited, activate the corresponding notifications, and that’s it.
Strategy 5: Save with the help of your company
Another way to save automatically is through the company you work for. You can always request that your company allocate part of your salary to your savings plan or voluntary pension, for example, in addition to social security contributions.
So, if you’re tempted to spend your paycheck when you get it, here’s an easy way to save money without thinking twice.
Now, if this strategy is not entirely functional for you because you receive a check or cash, the first thing you should do as soon as you receive your salary is to allocate the corresponding portion to savings.
