A successful debt settlement is just like taking a fresh new financial start and in order to achieve complete financial freedom, building an emergency fund should be your top priority. It’s like creating a buffer against sudden financial expenses in order to prevent falling back into debt, leading you to the same financial and mental distress.
Building an emergency fund seems like a daunting task but it really isn’t especially if you commit to your goal. All you need is a little financial discipline in order to achieve it. If you’ve already been through a debt settlement, you probably do realize that debt is never a good option. It comes with temporary relief but long term consequences that can damage your financial life to a whole other level especially if you aren’t able to pay it off. Moreover, if your previous creditor agreed on a settlement, you never know if the next one will or not. No creditor is under any obligation to accept a debt settlement offer so to save yourself from all the hassle, it’s best to have an emergency fund ready so that you don’t feel the need to take up another loan.
How Emergency Funds Work
It’s of utmost importance to have an emergency fund backup at all costs especially if you don’t want to go through the shock of sudden expenses. Loss of income, medical emergencies, divorces and other financial hardships are inevitable and you can’t predict them either. You should always be prepared to deal with such difficult situations to lessen the damage.
Now, having an emergency fund means you’ll be able to deal with your day to day expenses without any hassle even if you are going through a critical financial situation. What you must know is that this fund shouldn’t ever be used to make any unnecessary purchases. It’s for emergencies, it’s the fund that can help you survive by being able to afford your necessities in case you run out of money.
Not having a fund increases the potential for debt. In such a situation, if an emergency strikes you, you’ll either rely on your retirement money, your vehicle savings or most likely debts like car loans and credit cards etc. As far as the amount of money you should have in your emergency funds is considered, it depends on your lifestyle and it varies from person to person. However, it’s highly recommended that you should have at least three to six months of expenses saved in your account to deal with your rough patch.
Practical Steps To Create An Emergency Fund
Here are some of the most effective steps that can come in handy to you when you want to build an emergency fund. If you stick to the steps and commit to the process, this journey will be a lot easier for you!
1-Start By Assessing Your Financial Situation
Evaluating your finances is the most important step of the process. You need to know what your income is, how much you make from your side hustle, what your day to day expenses consist of and which one of your expenses are unnecessary and avoidable. When you take a comprehensive look at your finances, it gets easier to set realistic and achievable goals to build your fund.
2-Setting Your Realistic Fund Goal
When setting your fund goal, you don’t specifically need to aim for higher figures. Just stick to the figure that’s affordable and easy for you to set aside. Even if it’s just $500 to $1000, save it and then eventually when your income grows, you can grow the amount too and manage to save at least 3 to 6 months of your expenses including mortgage, rent, utilities, food, transportation and insurance. There’s no one figure, set for all, in fact, it depends on the personal situation of the person. For example, if you are self-employed and have a volatile income then you should aim to save at the higher end.
3-Creating A Strict Budget
If you want to make room for savings, the key to it is to have a well structured budget. When budgeting, keep the 50/30/20 rule in mind. It’s like a universal rule that people follow where they spend 50% of their income on their needs, 30% on their wants and the rest of the 20% is for paying off debts or savings.
When creating a budget to manage your emergency fund, you must cut down your unnecessary expenses at all costs. From extra subscriptions that you don’t really need to dining out a lot and making large purchases, you must cut it all down at least till you have enough in your emergency fund to survive a financial hardship. The best tip you can really use here is to automate your savings to a dedicated account. Even if it’s just $10 every week, you must automate it because this will make the savings journey a lot easier for you.
4-Adopt Consistent Savings Habits
Post-settlement, expect to have limited cash flow but that shouldn’t stop you from adopting healthy saving habits. All you need to focus on is to start small and then increase your savings. Look for any chance you get to save money on tax refunds, gifts and bonuses. Make a spreadsheet or use a savings application to track your progress and stay motivated to achieve your goal.
5-Keep Your Emergency Fund Separate
You have to resist the urge of using your emergency fund. Only use it when it’s your last resort and the only other option left is another loan. As said earlier, it seems like a relief when your loan is approved but what comes after is something you’d never want to deal with. Especially if you are already short on money then debt can become a huge burden for you and debt settlement won’t always work. You should keep your emergency fund separate and it shouldn’t be linked to any of your checking accounts. Your account should be your sole financial net and you shouldn’t ever use it to fulfil your unnecessary needs.
When To Use An Emergency Fund
Having an emergency fund is just the first step to securing your financial future. Knowing when and how to use it is another important art that you must master. Here are some reasons that explain why and when you’ll end up relying your fund;
- Sudden and unexpected drop in pay or loss of job
- An unexpected medical bill
- An unexpected car repair bill
- Emergency home repair
Your emergency fund shouldn’t be used for your day to day expenses, any kind of impulsive purchases, investments or debt payments. You should only use the money when facing dire circumstances so when an emergency arrives, you shouldn’t be afraid to use it because that’s the reason why you’ve been saving. Once used, you should start saving and replenishing your fund again.
Final Thoughts
Creating an emergency fund after a recent debt settlement is one of the smartest financial moves you’ll ever make. It’ll help protect your progress and it’ll help you when life throws a financial hurdle in your way. Even if you don’t require it, an emergency fund will bring you the kind of mental peace you need as you won’t fear any unusual circumstances ever. Your utmost goal should be to secure your financial future in the long run and even if it means starting small, you should. Moreover, staying consistent with your efforts is the key here. Adopt healthy spending habits, cut down unnecessary expenses and see how things work out in your favour.
FAQs
Q1.Can I Build An Emergency Fund While Paying Off My Other Debts?
Yes you can and you should especially if you don’t want to take up another loan again. Even if it’s a small contribution, you should go for it and build an emergency fund immediately. You can try using the split approach where you use a portion of your income to pay off your monthly dues and the rest of it should be directly deposited into your savings account.
Q2.How Long Will It Take For Me To Build An Emergency Fund?
It depends on your monthly income and most importantly the amount you are saving every month. Usually it takes around 6 months to 2 years to create a fully funded emergency account. Even if it’s just $10 a week, automate your payments and start saving.
Q3.Should I Use My Emergency Fund For Investment Purposes?
No, you should keep your emergency funds in a low risk liquid account. For example, if you are planning to invest in stocks then you should know that the market will fluctuate and the funds won’t be available in case you need the money urgently.
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