If you still don’t have a secure emergency found, even tiny, you should immediately build one.
According to a 2020 poll by Bankrate, 40% of Americans would know how to manage a 1000$ emergency using their savings. This means 60% of the American population should ask their families for help, open a loan, or even sell their belongings to cover the emergency.
Also, Bankrate defined how only 26% of the familiar emergencies of 2019 were below 1K dollars, 42% were between 1K and 5K, and 29% were over 5K. So even if you are not American, like me, this data should trigger a reaction in the way you manage your money.
Could you manage a 1000$ emergency tomorrow, if that happens? And what about 5K? Do you know how to build a secure 5K emergency fund?
If you don’t, then you probably need an emergency fund. So let’s see how to build a secure 5K emergency fund and what advantages you get from it.
Why do you need to build a secure emergency fund?
There are different reasons why an emergency fund should have a high priority on your money management list. First of all, it gives you more security when dealing with the possibility of losing your job or your bargaining power. Moreover, a secure emergency fund allows you to leave your job and give a shot at your dream project without too many risks. But these are only a few of the benefits you can have from an emergency fund. Here are the most important ones.
1 – Security, Power, and Freedom
A secure emergency fund gives you the ability to live without too many worries about losing your job. In the long run, this will make you less stressed and so healthier.
Living without stress is one of the most important financial goals of our lives. Not only because of the serenity it gives us but also because of the power and freedom we gain by having a backup plan.
In particular, your bargaining power when searching for a more satisfying job or requesting a well-deserved promotion grows immensely. By creating a fund, you become free to try new work experiences because you are less dependent on your employer.
2 – Medical Needs
Medical issues are another one of the main reasons you need a secure emergency fund. Even if you are healthy, you cannot underestimate the possibility of having health problems that require immediate intervention for you or your loved ones. In this case, a savings account could save lives, especially when you do not have medical insurance.
3 – Dream Projects
If you have a dream project you always wanted to achieve, you need a starting point. When you are young, with no money, it will be difficult to achieve anything completely free. But once you grow up and gain some investing power, you will have to decide if you want to take the jump and exploit your idea.
In this case, you need a starting point and a fund that allows you to live without any income stream until your project grows enough to give you some introits. However, you have to consider the possibility of failure, so how to survive for the time you need to get a new job, so set your emergency fund accordingly.
How to build a secure 5K emergency fund
Financial experts suggest building an emergency plan that allows you to live with dignity from 3 to 6 months. Still, the amount of money to save depends on your situation and the type of comfort you want to achieve. For example, if you need fund for a dream project, you may consider a longer period. Or if you have a big home, with considerable expenses, you will need more money than someone who lives in a flat.
A good starting example for an emergency fund is 5000$. Reaching this sum over many months will slowly help you entering the mindset of saving up and putting money in a fund. And even if you can save more than 5K dollars, I suggest starting with a small sum threshold. Later, you can extend your goal.
In the following image, I will give you a track to achieve 5000$ in one year.
I made it more interactive by saving up a different sum each week in the second part of the year. But you can define a fixed monthly sum if you struggle with saving manually each week. In fact, it can be arduous to keep yourself from spending the money you have in your bank account. So if you struggle with that, you could consider an automatic transfer operation from your main to a saving account each month. Furthermore, don’t require any credit cards for this account, so you can access them only when needed.
Once you reach the 5K threshold, you can decide to increase the goal, make another one, or stop there. Everything depends on how your life changed by saving up each week and the benefits you got from saving them.
The 2-Questions Test
To decide which sum it is better to reach before feeling secured, use the 2-Questions Test:
- How much do you need to spend on mortgages and other fixed monthly taxes that you cannot interrupt?
- How much do you spend monthly on food and drink for strict survival? Even here, try to remove anything unnecessary.
Once you obtain that sum, multiply it for the months of your dependency you want to achieve, and you have your final sum.
When should you start a secure emergency fund?
There is no correct answer for when to start an emergency fund and how much money to put on it. Of course, the sooner your start, the sooner you end it. As a side effect, saving up makes you value your money because you will have a lower income each month. You will start asking yourself if everything you buy is worth it, which will give you a better resistance towards compulsive shopping and marketing strategies.
Saving up is the ability to use a mindset that is focused on the future. It is about managing money to prevent any emergency and improve the mood of your life.
You should know by now how to build an emergency plan. Do you want to manage your money better now? Here you can find how to develop a financial plan.
Also, if you liked the article, consider subscribing to the weekly newsletter.