The biggest financial mistake most people make throughout their lives is typically getting into debt when they could have avoided it.
Yes, we all have to deal with the occasional emergency during our lives but it's the financial ones that usually last the longest. But it doesn't have to be this way.
Why You Need an Emergency Fund
An Emergency Fund is exactly what it sounds like, it's a pool of money that can be used for unexpected emergencies. Be it physical or even financial, as being prepared ensures you'll never need to beg, borrow or steal money to get over any short-term financial difficulty.
Sadly, most people aren't prepared for a job loss, medical expenses or emergency repair bill and usually turn to a credit card to provide financial relief.
Of course, this comes at a financial cost, and will ultimately add stresses on your finances for a long time into the future.
But this pain can be avoided by simply starting an Emergency Fund.
How to Set up an Emergency Fund
Keeping money separate from your normal spending is the key to setting up a successful Emergency Fund. And the best way to do this is by starting a separate bank account, where you add a small percentage of your pay automatically.
This amount can be anything you like but typically you won't miss 5% of your earnings and will learn to adjust your lifestyle accordingly.
If you don't have access to a bank account then put some money away in a jar, but you can't touch it unless it's an emergency.
A lot of willpower is required for this method.
And I'd suggest leaving yourself a little note in the jar stating exactly the type of emergencies you are saving for. That way you'll be reminded if you suddenly have a brain fade and think replacing your mobile phone with the latest iPhone is an emergency.
Obviously, it is not.
You could also ask a family member to hold the money for you but this may lead to trust issues in the future, so I'd advise a bank is a better bet.
Never underestimate the power money has on people
Note: Even writing on Steemit could be a form of forced savings and could easily act as your Emergency Fund if needed.
Set Yourself an Emergency Fund Goal
So an Emergency fund isn't like ordinary savings and you should always set yourself a target or goal amount to reach and then stop there or you might resent not having access to the extra money later down the track.
Firstly, consider the type of emergency you are saving for.
Medical expenses and loss of a job are usually the most common emergencies requiring money, so I'd suggest saving enough money to cover at least 3 months wages, which should also be enough to cover those emergency medical expenses if the need arises.
What you're trying to avoid is a massive credit card bill at the end of the month, which will be hard to pay off and will accumulate around 20% compounding interest well into the future.
Ouch!
And if you find yourself in need of emergency funds before you've reached your funding goal then make sure you pay off any credit card debt first before starting your emergency fund savings again.
Credit Card Debt is the worse debt you can have, and the lending institutions know it too!
Always, pay more than the minimum credit card payment or this debt will be with you for a long time to come.
But I'll write more on managing debt in future posts, so don't forget to 'follow' me so you don't miss them.
Do you have an Emergency Fund?
And how much do you think you need to overcome any financial emergency?