You don’t grow an emergency fund overnight. It takes time and hard work to create financial security.
Your strategy to build an emergency fund goes through different stages depending on how much you have set aside. Let’s look at the three main stages of your emergency fund and what they entail.
Stage 1: Ground Zero
When you first start, you won’t boast a big balance in your savings account. Unless you get a major windfall, you have to build your emergency fund like everyone else — through small, consistent contributions.
According to a common budgeting rule, you should save 20% of your take-home pay across all emergency and retirement funds.
Don’t worry if you can’t hit this target right away. Anything is better than nothing at ground zero. The important thing is getting used to saving every month, whatever that might be.
During stage one, your savings might be too small to cover an unexpected expense. But don’t worry. You can rely on online personal loans in emergencies. Visit a platform like MoneyKey to learn about your potential online loan options. These options might include a line of credit or installment loan.
Going online for financial assistance can enhance the borrowing experience. It’s easy to compare what you see from your screen, especially if you take advantage of accessibility widgets. These apps remove barriers that prevent you from understanding your options.
Stage 2: Hitting Targets
Once you incorporate monthly savings, you can focus on hitting hard targets. Most savings benchmarks suggest you save three to six months of living expenses in your fund.
You will spend the longest time in stage two. After all, three to six months of living expenses is a huge figure, no matter what.
It’s also a tough time to be a saver. According to some research, most people would need two years to save one month’s worth of living expenses. On this timeline, you might spend 12 years hitting a six-month fund. And that’s assuming you don’t have to withdraw cash to cover unexpected expenses along the way.
Stage 3: Looking Beyond Emergencies
You enter the next and final stage of savings once you hit your target. At this point, you want to maintain your savings. You should replenish any money you take out to cover an unexpected expense, but don’t go over your goal.
Saving above and beyond this amount isn’t an effective use of your money. You can put this surplus cash to better use in a specialized savings account, like a retirement fund or investment. These accounts earn more interest, which will help them grow faster.
What Stage Are You In?
Take stock of your finances to find out where you fall on this scale. Knowing what stage you are in can help you determine what you should do next. Wherever you are, prioritize your savings.
Think of your emergency fund as a personal financial Key Performance Indicator, tracking how well you can handle the unexpected. The more savings you have, the easier you can cover an auto repair or medical expense without missing a step.
