Extramile Finance

Life throws a curveball when you least expect it. Of late, you all have understood the importance of having an emergency cushion to get by during financial hardships. Unprecedented levels of the soaring cost of living pushed millions of people on the verge of a never-ending cycle of debt.

Unexpected expenses can crop up at any time. For all an impressive amount of savings, you would be hard-pressed to tide over when you are caught unawares by unforeseen expenses. Experts suggest that you put in some money whether you are living paycheque to paycheque or you have a sound financial condition.

Now the question is what an ideal emergency cushion looks like or what should be the size of an ideal emergency corpus.

• “It depends on your financial circumstances like how much you earn every month and how much you spend.”

What is an emergency cushion?

An emergency cushion is a sum of money that you set aside and dip into only when unforeseen expenses pop up. In other words, these savings are also called a rainy-day fund. The following are the expenses that come under the category of unforeseen:

• Home repairs
• Car breakdown
• Large vet bills
• Medical bills
• Unemployment
• Replacing or repairing appliances like a boiler, microwaves, and the like

The idea behind building an emergency cushion is to make money accessible when you out of nowhere need it. This will prevent you from taking out a loan. Suppose you lose your job, and, luckily, you have an emergency corpus. Until you land a new job, you can dip into it instead of taking out a payday loan for the unemployed.

A rainy-day fund can help ease off the additional pressure of expenses on your budget when you are already in a tight spot.

How much money should you stow away?

You should aim to save three to nine months’ worth of living expenses. You must have a very good income to be able to stash away six to nine months’ worth of living costs. Experts suggest saving three-month worth of household expenses as it will help cover your daily expenses when you are out of work.

You might take a month or two to land a new job. These savings will come in handy then. But people living paycheque to paycheque will not be able to save this much money for a rainy day. As a result, it will be all but impossible to be able to set aside money for three months’ worth of living costs.

The size of your emergency savings depends on your financial circumstances. You may or may not be able to save this small amount of money. Well, it does not matter how much your monthly income allows you to lay aside. The question is if you stick to your contribution.

Most of the people fail to build savings for a rainy day as they do not stick to the savings plan. Experts say that you pay yourself first. Choose a fixed sum of money that your budget allows and then set it aside as soon as you receive your paycheque.

An emergency cushion will be more significant when you are retired. As you will be living off your pension, you will need savings that cover expenses worth a year or two. During the golden years of your life, your expenses may go up. For instance, your medical expenses might be high.

It will be hard to cover unexpected expenses from your pension so you will need larger savings. It is always suggested that you generate a fixed source of income in the golden years of your life. You should have an additional supply of income to be able to cover all of your expenses, including unforeseen ones.

Tips for building an emergency cushion

Now that you know what should be the size of an ideal emergency cushion. The next step is to know the ways to create the one.

• Calculate your expenses

Knowing your monthly expenses will give you an idea of how much you should set aside as an emergency cushion. Calculate all essential expenses like:

• Food
• Mortgage payments
• Rent
• Unsecured loans
• Credit card bills
• Utility expenses

It is unnecessary to stash away all the spare money, but it will help you choose a specific amount you can put in every month. Even if it is a small amount, stick to it. It will help you keep your savings growing.

• Do not dip into it

Make sure you do not use your emergency savings for any other financial goals. These savings will help you tide over when unforeseen expenses crop up. It is a bad idea to dip into these funds to buy your car because otherwise, it will not be able to cover emergency expenses when they catch you by surprise.

• Choose a savings account

Do not keep this money at home. Otherwise, you will end up using it for your regular expenses. You should instead open a savings account that allows you to access these funds this instant. Choose a savings account that yields you an impressive amount of interest.

Talk to your bank. They may offer you better interest on your savings if you have a good relationship with them. Connect it to your pay account so that you can transfer money on your payday. Choose an auto-debit mode if possible.

• Stick to your saving plan

You know how much amount of money you need to set aside every month. Make sure you stick to your goal. Consistency is a must to ensure your savings keep growing.

The bottom line

Building an emergency fund is essential to meet unforeseen expenses. It depends on your financial circumstances how much you would be able to set aside money for a rainy day. However, make sure you choose a fixed sum of money and stick to it. If you are still unsure about how much money you should set aside, talk to a money advisor.