Storm clouds are on the horizon. Canadians saved 27.5% of their money during the second quarter of 2020. That number dropped to 14.6% in the third quarter.
You cannot let yourself run out of savings. Times may be tough now, but times may get even tougher in the future. The pandemic is going nowhere, and employment opportunities may dry up.
If you want to protect yourself, you need to know how to start an emergency fund. But what is an emergency fund, and what do you need to do before you start one? How can you save money and find opportunities to make more money?
Answer these questions and you can stay dry during rainy economic times. Here is your comprehensive guide.
Understand the Essentials of an Emergency Fund
An emergency fund is a buffer for yourself. It helps you pay for unexpected expenses that could bankrupt you or keep you from paying the rent.
The money in your fund should go toward your health and wellness. It should not pay for the latest iPhone or Playstation.
Your emergency fund is separate from your retirement fund and other savings. You can dip into your savings account to cover things like vacations. You should only use your emergency fund in a dire situation, such as unemployment.
An emergency fund can also help you with debt. You won’t have to borrow money during an emergency because you have some money saved. But you should use other resources to pay off debts and only tap into your emergency savings if you have no other options.
Educate Yourself on Finances
Spend some time learning about good financial strategies. You can go to an accountant, banker, or financial advisor to learn information from them.
You can also go online and download free guides. Make sure you know how to start investing before you put your money in a financial venture.
If you’re really interested in investing, you can take classes from online schools. Some colleges and universities have free talks that you can attend as well.
Figure Out How Much You Need
The average period of unemployment in 2021 lasted 22.9 weeks. That’s more than five months without a main revenue stream.
You should have enough money saved to cover at least three months of unemployment. But the more money you have saved, the better.
Try finding the exact amount of money that you need. Being specific can help you start saving for emergencies.
Look at your current expenses. Think about how much you pay for food, housing, and energy. Multiply these amounts until you have a figure for three months.
You can save a little more money than you need. Your expenses may increase while you are unemployed, and you will need internet access so you can find a new job.
Once you reach the amount you need, you can stop saving money. You should transition to saving for your retirement account and upcoming expenses.
If you put in too much money, transfer the excess into a retirement account. You should learn how to prepare for retirement and start saving for it while you are creating an emergency fund.
Set Saving Goals
Your emergency fund amount is your end goal. But it can be a difficult one to reach.
You should consider a series of small goals that help you get to the amount you want. These will give you steps you can take week by week to save money.
Your goals should be precise and measurable. You may want to save $50 a week, every week for a month. You may want to find a way to cut your energy bills so you can put money into your savings account.
Don’t become disappointed if you can’t reach your goal. Figure out what went wrong and then take steps so you don’t make the same mistakes again.
You should feel a sense of accomplishment when you meet your goal. Try celebrating in some way that doesn’t involve spending money. You can watch a great movie or hang out with your friends.
Open a Savings Account
A savings account isn’t a normal bank account. It has features that encourage you to save money over time. The bank may impose a cap on your withdrawals or you may not have options to transfer your money.
Some banks offer high-yield savings accounts. These accounts allow your money to gather interest so you have more money through time. You should open a high-yield account as soon as possible.
You can add an automated function to your account. When you receive a paycheck, you can ask your boss or bank to transfer some money into the account. This helps you save money without exerting too much effort.
A bank employee may try to sell you on other services. Keep focused on your savings account. Do not open a new credit card or line of credit.
It is okay to keep a little money on a prepaid card or in cash. Yet you should keep in mind that a card or some dollar bills can get stolen.
You should store these assets in a secure location such as a safe. If you’re worried that you might spend your assets, you can leave them with a friend or family member.
Manage Your Cash Flow
Your cash flow is the schedule of when your money comes in and goes out. If you don’t schedule your flow well, you may not save all the money you need.
Track when your paychecks come in and when you pay your bills. If you have debt, talk to your creditors and see if you can adjust your due dates. Extending your due dates may give you more time to make and save money.
Monitoring your cash flow will help you figure out how you can reduce your expenses. If you have a high utility bill, you should minimize how much electricity you use.
Find One-Time Opportunities to Save
You may get a sudden influx of cash. A relative may give you some money as a Christmas present, or you may get a tax refund or a settlement.
Take advantage of these opportunities to contribute to your savings. Put most or all of the money into your emergency account. If you have some money left over, you should put the remaining money in your retirement account.
Create Multiple Income Streams
The more money you make, the more money you can save. Find every opportunity you can to increase your income.
If you work a full-time job, you can turn your hobbies into an income stream. You can write stories, draw sketches, and tell jokes for money.
You can sell the objects in your house at yard sales. Very valuable items can go up for auction or to a museum.
You can make an investment in a company if it seems like a good opportunity. But you should be careful.
Don’t invest in something just because your family member or friend is running it. Assess what their plan is to turn a profit and distinguish themselves from their competition.
If you have a part-time job, try to find another job. You can take a job that lets you work night or weekend shifts.
Monitor Your Fund
You should check on the amount of money in your fund every month or so. Even if you think you know how much money is in it, you should check it to make sure no one is siphoning money out of it.
Take the opportunity to evaluate your savings strategy. You may need to change some things so you save more money in less time. Feel free to talk to a financial advisor about the steps you can take.
If you have any investments, you should be checking them as well. Keep in mind that your investments may go through a brief downturn. But if they are not doing well, you should shift your money into your savings.
Master How to Start an Emergency Fund
You can figure out how to start an emergency fund. You should remember that it is a fund you tap into during very difficult times. Figure out the exact amount you need to save.
Then start saving right away. Open a savings account, think of small goals you can reach, and manage your cash flow.
When money comes into your life, save it away. You should have multiple income streams to build your savings as much as possible.
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