We can never predict when emergencies and unexpected events will occur in our lives. Whether it’s a sudden illness, job loss, or car repair, having an emergency fund can provide a safety net and peace of mind. Without one, individuals may have to rely on credit cards or loans to cover unexpected expenses, which can lead to debt and financial stress.
We discovered that my late mother-in-law had advanced brain cancer sometime around 2022. My husband had to work less as a result, which had an impact on our monthly income. We had to make significant withdrawals from our emergency fund and even struggle for a few months.
That made me even more determined to work on increasing my emergency fund in case of unforeseen circumstances or expenses in the future. If you haven’t already started, I strongly advise you to do so. Here are some simple steps you can take to start saving for emergencies:
What exactly is an emergency fund?
There is a lot of talk and news about the importance of having an emergency fund. But not everyone has one. According to a survey conducted by PIDM and the Behavioural Insights Team (BIT), 55% of respondents have less than RM 10,000 in emergency savings on hand. This demonstrates how most Malaysians are inadequately prepared to withstand financial shocks. They also discovered that those with irregular incomes had very few emergency savings.
An emergency fund is a sum of money you have set aside to help you get through a crisis, such as an unanticipated illness, car trouble, or even a job loss. Here is a list of some common emergency fund items:
To put it simply, having an emergency fund in place in situations like these will not be frustrating because you have what it takes to manage them financially.
Without a proper emergency fund in place, you are more likely to get into debt because you will have no choice but to borrow money when an emergency expense arises.
How much money should you have in your emergency fund?
When it comes to the amount you need to have in your emergency fund, there is no one size fits all formula. However, you can use your imagination to anticipate potential unforeseen expenses, whether they relate to your own needs or those of someone who depends on your finances.
For example, if you own a car and have car trouble one day, you should be able to estimate how much money you would need to spend on the car to fix it. You can try to make predictions about your medical expenses in a different situation. You can calculate how much you have spent by averaging your past experiences.
Some people have more than enough money set aside for emergencies. Keep in mind that this group of people is highly paid. It is therefore acceptable to start small and work your way up if you are in a position where your income is not high. Even a small emergency fund can be built over time, but it is possible. Building your emergency fund based on your own financial capacity rather than what is shared by others would be necessary.
Advantages of Creating an Emergency Fund
Building an emergency fund has a number of benefits, but one major benefit is that debts may be avoided. The likelihood of being in debt would be reduced if you had an emergency fund.
Imagine yourself in a situation where you need to fix your car immediately but lack the funds to do so. At that point, you would require financial assistance to repair the vehicle. However, having an emergency fund would be very beneficial for you. To build a healthy financial future, you must avoid debt at all costs.
Taking the first steps towards funding your emergency fund
Making the first deposit into that emergency fund can be intimidating. Finding the best strategy for getting started immediately and maintaining consistency while building that dream shouldn’t require much brain power.
Create a separate emergency savings account
It is best to open a separate savings account each time you want to pursue a goal that requires saving money. One of the most important things you can do to improve your spending habits is to open a separate account. This will prevent you from spending too much of your income.
Here are some of the best high interest savings accounts to look into and select from: https://ringgitplus.com/en/savings-account/high-interest/
You can use the list to help you decide which savings account best fits your objectives. When selecting a savings account, consider the fees that the institution may charge for opening an account as well as whether it offers a reasonable interest rate at a low fee.
One thing to consider is how much interest you earn from the account, but don’t let that be your primary motivator.
You would be more likely to live within your means if you had a savings account because it would psychologically help you know how much money you can spend and how much you should keep in reserve. If you combine your emergency fund with your regular account balance, you won’t be able to distinguish between the two and are more likely to go on a spending binge. If you kept it separate in a savings account, you would not be tempted to touch it because the money is not easily accessible.
Set up automatic deposits into your savings account
Once you have opened a savings account for your emergency funds, the next important step is to set up automatic deposits so that a certain amount of money goes directly into the account without you having to do anything. Which you can easily set up through online banking.
It is advised to treat your emergency funds like regular bills while attempting to automate them, because that is what they will ultimately become: emergency bills. This means that the monthly budget should include your fund contributions.
You won’t need to constantly remind yourself to save money for your fund once your deposits are automated. More importantly, you won’t be persuaded to use the money for something else.
Break down your savings goal into smaller steps
You must know how to allocate your savings into smaller chunks if you want to successfully add to your emergency fund. Normally, it would take a lot of time to accumulate a sizeable amount of savings in your account, especially if you don’t make a lot of money. To avoid having to save a large sum of money in a short period of time, it is important to start small.
You can start by setting a modest initial goal, taking into account your current income. You can begin with as little as RM 1000 or as much as RM 10,000 annually. You can reach your first milestone if you set a goal of RM 1000 in a year, which translates to RM 80 per month and RM 1000 at the end of the year. That might inspire you to start an emergency fund.
The main reason for setting smaller goals for your savings is to make sure you don’t give up. Once you save a little bit of money, you can still have enough to pay for other important costs.
Works towards funnelling extra money into your savings account
The moment your savings game is in motion, you can relax and observe your progress, watching your emergency fund grow. But if you want to speed up the process a little bit, you might want to add some extra money to your savings account.
Utilising any extra cash you come across during the month is one way to achieve this. For instance, if you are a business owner or a freelancer, your monthly income cannot be fixed.
There are months when you’ll make more money, and there are months when you won’t. However, once you realise you have some extra money, try putting some of it into your savings account so you have a backup plan. If you’ve been wondering how to quickly accumulate an emergency fund, you should give this a shot.
As a salary earner, however, there are times when you might also receive bonuses or other financial benefits from your employer. Send this money to your savings account rather than spending it on something unimportant. How to create an emergency fund is as follows:
Increase your income and reduce your spending
Once you have a target number and a goal in mind, increasing your income will come naturally. Finding practical ways to increase your income and decrease your spending will therefore speed up the process of building your emergency fund. Cutting back on unnecessary expenses is typically one of the most common pieces of advice given to people who want to earn more money.
The amount of money you have been wasting won’t become apparent to you until you sit down and review all of your purchases. You’ll discover that a lot of unnecessary costs are depleting your income and adding little to no value to your life.
So you don’t always need to work multiple jobs or find a side business to increase your income. Instead, it would be best to significantly reduce your spending.
Here are some tips that can help you cut down on your spending:
Stop going out to eat. Learn to cook at home instead of going out to eat with your friends all the time.
Make a shopping list. Always shop with a list rather than entering a store and making impulsive purchases.
Avoid going shopping with friends because they might encourage you to spend more money than you intend to.
Buy debts only if you absolutely need them. It can be difficult to save money for anything, much less an emergency fund, when you have debts to pay.
Review your budget frequently
It’s not enough to know how to start an emergency fund. You also need to constantly review your budget as you save money towards the goal.
A budget is essential when creating any kind of financial plan. Regular budget reviews are necessary to determine whether or not your saving and spending patterns are in line with your financial situation.
When you are reviewing your budget, take the time to look at your spending to determine whether you are going overboard. You need to take action as soon as you realise you are overspending. For instance, try to cut the cost of groceries by at least 15% if you spend RM1,000 every other month without necessity.
You must control your spending behaviour, or you will eventually run into trouble while attempting to build an emergency fund.
Use the emergency fund only in an emergency
If you are determined to accumulate an emergency fund, you must only draw on it in the event of a serious emergency. If you consistently use your emergency fund for things other than emergencies, it won’t be able to grow.
It’s interesting how many factors could make it impossible for you to keep your emergency fund intact. A brand-new smart TV, a getaway to the beach, the newest smartphone, or any other non-emergency situation could tempt you.
You could avoid a great deal of anxiety and emotional stress by having an emergency fund. You won’t always be in a panic mode now that you are aware that you are financially prepared to handle any emergency situation. You won’t have to constantly ponder what to do when faced with unforeseen expenses.
Another major advantage of having an emergency fund is that it protects you from needless debt. You can usually handle most situations without borrowing money if you have an emergency fund.