Learn How to Build an Emergency Fund and Prepare for Life

We never know what tomorrow may bring. Dreams can come true, and plans can be fulfilled. 

However, at the same time, situations can turn upside down and bring serious problems, like job loss, illness, and accidents. 

To avoid being unprotected during desperate moments, it’s important to take advantage of good days to create an emergency fund and build essential savings to feel secure and avoid living on the edge of expenses. 

With this in mind, we’ve put together fundamental tips to help you build an emergency fund and achieve financial security.

What is an emergency fund?

Although the term is a bit subjective, an emergency fund is a sum of money set aside to be used in times of need. 

Unlike an investment, which aims to grow over time, often with contributions and riskier strategies when necessary, an emergency fund focuses on security and accessibility. 

However, this doesn’t mean your emergency fund can’t earn returns. The point is that growth isn’t mandatory or the main goal. 

For this reason, many people have both investments and an emergency fund, separate and with different focuses. 

If that’s not the case for you, that’s fine too; the important thing is to have some money saved for when you need it.

What is the ideal amount for an emergency fund?

This is also a very personal question, but there are some guidelines. Ideally, you should have at least 6 to 12 times your monthly expenses saved. 

This means that if your monthly expenses are $3,000, a good emergency fund would be between $18,000 and $36,000. 

This amount takes into account the need to ensure subsistence for a period without income. 

It’s harder to estimate an exact amount for specific issues, like medical emergencies or home and car repairs, so the important thing is to save as much as possible.

Make a financial plan

To start saving money, the first step is to create a financial plan. Sit down by yourself or with your family and review all income and expenses each month. 

Identify the main areas where you spend money, such as rent and food. This way, you’ll know exactly where your finances come from and where they go. 

From this, set goals. How much do you want to save in the coming months? And how will you achieve this? 

Don’t skimp on tools when creating your financial plan. Use apps, spreadsheets, or even a simple notebook.

Make your emergency fund a priority

Ideally, you should set aside the chosen percentage for your emergency fund every month, before spending on daily priorities. 

For instance, if you earn $10,000 and decide to save $1,000 each month for your emergency fund, withdraw the $1,000 as soon as you receive your income, even before paying other bills. 

This is why you need a realistic plan that you can maintain in the medium and long term, not just once a month.

Simple Tips for Saving Money Day-to-Day

Here are some tips on daily habits you can change to save more money:

• Try to eat at home most of the time.
• Review streaming subscriptions charged to your credit card.
• Avoid impulse spending.
• Make a list of what you need to spend money on each day.
• Track all your expenses and avoid leaving things on autopilot.
• Think twice before making a purchase.
• Find other hobbies to relieve stress without spending money.

Additionally, treat yourself to small gifts now and then, especially to help you stay focused on long-term saving.

Can You Use Your Emergency Fund?

This is a tricky question—after all, what counts as an emergency? 

The decision is personal, but ideally, you shouldn’t dip into your emergency fund too often. 

With good budget planning, in theory, you’ll have enough income to cover your needs without resorting to emergency savings. 

However, over time, you’ll need to develop judgment to know when it’s truly necessary to use your emergency fund so it fulfills its purpose effectively.

Written by

Gabriel Gonçalves