How big should your emergency fund be?
We as human beings are subject to all kinds of crises. They could be health related, career related or financial. In these volatile times we live in, people are losing their jobs, falling ill to the novel corona virus disease, or worse, getting caught up in an ailing economy where they have no control whatsoever on the exponential rise of prices in supermarkets and retail stores.
In such cases, having a savings account is more important than ever. In fact, saving is an essential step that everyone needs to take in their life, sooner or later - the sooner, the better.
First and foremost, saving money is important because it helps protect you in the event of a financial emergency, and let’s be honest, most emergencies in your life will eventually translate into financial ones. If you have a health emergency, you will need to have medical insurance, which is costly, and if you lose your job, you will need to dig into your savings to pay your bills.
There are many forms of saving: saving for retirement, saving for education, saving for to pay off loans, saving for investments and saving for emergencies (in the form of emergency funds).
An emergency fund is a source of ready cash in case of unplanned expenses. This could not have been more relevant than today’s COVID-19 riddled world. If there’s anything we learned from this pandemic, it’s that we all need to have an emergency fund to cushion the blow of sudden unemployment, or having a salary cut in half, or even worse, dealing with an economy weakened by the virus.
How much money should be in your emergency fund?
Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months’ worth of living expenses. With three being on the “stable end” of things for people with stable jobs, and six being for people with unstable income such as freelancers or people who rely on commissions.
Having an emergency fund prevents you from liquidating your retirement accounts, something most people tend to resort to when in need of urgent cash, and liquidating your investments, where people sell their stocks. Either way, you can’t go wrong with an emergency fund.
How should you save for your emergency fund?
Nothing beats saving money the “piggy bank” way - i.e., stashing money on a daily, weekly or monthly basis. It’s all about consistency. For example, let’s say you set aside 20 JOD a week in an emergency fund. In two years, you would have saved 1,920 JOD. That’s not too shabby, and daresay it would sustain you through most crises, COVID-19 included.
In order to save money, you can always track your expenses. This includes everything from your everyday grocery shopping, gas, online shopping, to your favorite latte. Once you have an idea of how much you spend in a month, you can begin to work around a budget and find ways with which you can cut your spending. Needless to say, cutting your spending will leave room for larger savings.
How to set up an automatic savings plan?
What’s the easiest way to save more money? You can let your money do the work by setting up a monthly automatic savings plan. Usually people set money aside from what’s left of their paycheck. While this works, you’ll need to adopt a consistent strategy - one that prioritises you to save and make you more money both in the short and long-term. Also, automating your savings keeps you within your spending limit without falling into the trap of forgetting to save and put some money aside.
Ask yourself how much you can afford to pay yourself each month. Then, go ahead and use your mobile banking app to automate money transfers from your current account and straight into your savings account. This can help build a habit of saving money, simply by sitting back and watching your savings grow month-over-month.
Saving is a habit that we must learn to adopt because it literally carries us through difficult times. We save because we can’t predict the future. We save because we learn from past mistakes. Ultimately, an emergency fund will help carry you through tough times. It’s never too early or too late to start saving now and securing your future.
