You need money to survive. However, money is scarce, and in some cases, you may lack the ability to earn because of eventualities such as; losing a job, accidents, etc. In case you lose your job, it may be impossible for you to survive for long on short-term loans like payday loans. In most cases, you can’t qualify for most types of financing if you don’t have a job. This explains why you should have a foolproof cash strategy in place to cover you in case of anything. Setting up a cash reserve/an emergency fund is a great way of ensuring you survive when you don’t have a job or when you are unable to work for whatever reason. How do you get started?
Step 1: Start by determining how much money is enough
The first step to setting up an emergency fund is to determine how much money you need every month in case your revenue stream stops flowing. Most financial advisers recommend that you should have at least six months worth of living expenses in your emergency fund. In a nutshell, you should be in a position to maintain your current lifestyle for six months without any extra income. When calculating how much is enough, remember to include car payments, mortgage loan payments, and medical payments among any other payments you incur on a monthly basis.
Step 2: Build your cash reserve
Once you find out how much money you need on a monthly basis for six months, it’s time to set up your emergency fund. If you don’t have an emergency fund or the one that you have is inadequate, here’s what you need to do;
First and foremost, start saving aggressively. To make sure you don’t over rely on short-term loans like payday loans during emergencies, you must start saving aggressively. Start cutting unnecessary expenses and channel that money to your savings account. You can use tools like payroll deduction or standing orders to help you become a disciplined saver. You can also sell current/liquid assets to raise money for your emergency fund. If you have things you don’t need at home such as old appliances, electronics, cars, etc., you can sell them and deposit the proceeds into your emergency fund. You can also channel proceeds from other investments i.e. stock dividends to your emergency fund going forward. The idea here is to set up your emergency fund fast in the best way possible.
Step 3: Keeping your cash reserve
You can use your savings account to store your emergency fund money. However, you need a better place to keep the money. You should bear in mind that an emergency fund should be readily available in times of emergencies. The money should also be protected from inflation so keeping it in a low-interest account isn’t a good idea. The money should also be exposed to little to no risk. With that said, you have a number of options. Money market accounts, as well as short term CDs, offer better interest earnings than typical savings accounts with little to no risk. Avoid mutual funds since they come with high investment risk. If you choose fixed term investments, remember to choose short investment terms to ensure the fund is accessible to you within a short time without penalties if you ever need the money.
Step 4: Keep reviewing your fund
A person’s income and lifestyle is bound to change with time. When this happens, you need to adjust your cash reserve to accommodate your new lifestyle. Reviewing your cash reserve periodically will help you assess whether the money is enough to cater for your needs at different time periods. You should keep building your cash reserve as your lifestyle changes. Ideally, you should review your cash reserve every year to make sure it meets your current needs.
Having an emergency fund is detrimental for your own peace of mind. Short term loans like payday loans can’t last you for months when you lose your job. In fact, it’s very hard securing a payday loan or any other type of short-term loan without a regular income. If you haven’t set up a cash reserve for emergencies or if the one you have is inadequate, you have all the information you need above to get started.