Last week, we saw that an emergency fund is money that you have saved to help you cover unexpected costs that come with everyday life.
Also, I shared that the size of an emergency fund depends on your current financial situation and will probably change as your financial situation does, but a rule of thumb is that an emergency fund should cover at least six months of your expenses.
Furthermore, I explained the importance of identifying a truely emergency; traveling to an exotic location to relax is not an emergency or buying an extra big screen TV, even when your existing one has broken down, is not an emergency. Some of the scenarios that can be categorized as an emergency are: the failure of a major appliance (cooker, freezer), major unexpected car repairs or home repairs, and travel arrangement as a result of a family emergency such as a death in the family.
It’s not easy to build an emergency fund when you are living salary-to-salary every month with no cushion to depend on but it is possible, though not easy, so it’s understandable that you may be struggling to build your emergency fund.
In last week’s article, I shared one tip on how to build your emergency fund really quick: sell unnecessary stuff. I shared that every one of us owns stuff that we do not need but we still keep them.
You should start selling those items that you truly don’t need and put that money into your emergency fund account. This week, I will share an additional two tips that will help you build your emergency fund fast.
A spending ban can help you grow your emergency fund really quick. You can set your spending ban anywhere from one week to a year wherein you refrain yourself from all spending other than for necessities.
Putting a spending ban, helps you free up money in your budget to put into your emergency fund without otherwise affecting your bottom line.
The spending ban will only work by first identifying which are your absolute necessities which can include; utilities (electricity bill, water bill), food, healthcare, rent, mortgage/any bank’s obligation, and gas. After that, for the period of the spending ban that you set, you will live without anything above and beyond those necessities.
Spending bans have no limit so you can have more than one and at the end of every spending ban, your extra money that you save can go into your emergency fund.
Create multiple income streams
Another way of building your emergency fund faster is by finding a way to make a little extra income on the side.
One great way to make additional income is by getting a second job (for full-time employees). For non-employees, options can be an Uber/taxify driver, or if you have skills that can be marketed, consider launching a part-time business that can earn you extra income.
By having multiple income streams, you can afford to stash more money into your emergency fund without starving yourself.
To summarize, how you approach the saving process, how much you save, and where you put the money depends on your own financial circumstances.
But the most important part is that you do indeed need to have an emergency fund for unexpected expenses.
Furthermore, it is important to note that the best place to put your emergency fund is through a saving account.
An emergency fund can mean a difference between financial failure and financial success and it will help you reduce your dependence on borrowing money whenever you have an emergency.
Having an emergency fund is a necessary block for establishing long-term financial stability. Anyone can do it; try to use the tips that I have shared these last two weeks and you will be on the right track financially.
Mr Mkwawa is a seasoned banker