LOUISE FAIRSAVE: How to build an emergency fund

THIS YEAR has been set as the one to start a personal emergency fund or, if you do already have one, to boost the savings in it. Starting from scratch, let us see how your emergency fund can be built.

In starting an emergency fund, it is better to set a modest goal – say, to save your first $1 000 which would be untouchable unless an unexpected bill arises. Funds saved in this way are not to be tapped for expenses like car/home insurance and property taxes, which tend to be irregular, significant expenses, but when and how much they will fall due are known. So, although the start-out goal may be modest, it is set with the specific requirement to be spent on unexpected expense only.

It is best to start your emergency fund right away even if the target goal is even smaller, once the prohibition not to spend on regular expenses is fervently observed. You need to maintain the weekly or monthly saving amount, treating it like a bill you pay to yourself. From time to time, adjustments in discretionary spending may have to be made in order to keep up the committed saving rate.

Similarly, if you receive a lump sum inflow of cash from say, a tax return or a bonus/overtime payment from your work, it would be a good occasion for you to consider the extent to which the amount received can be committed to your emergency fund. Are there other ways that you can make supplemental earnings? Can you examine your normal spending patterns and discover opportunities to cut back on discretionary spending? Maybe you can cut that mid-morning fast food snack which you buy when on travelling work assignments; or that half-price Tuesdays evening lime with your friends. Relatively small sums saved regularly help to build up the balance saved annually much faster than expected.

Another way to boost your emergency fund balance is to place all spare change in your pocket at the end of each day in a jar, only counting and depositing it to your emergency fund, say, around the end of each month. You will be surprised how small change can add up.

Hopefully, you will be even more surprised, as most people are, how a regular modest saving grows into a significant sum over a couple of years. Seeing your emergency fund grow should provide the motivation to complete more serious planning.

You will see that a sizeable emergency fund can be achieved from your modest start. It is then time to examine your spending in greater detail and really assess how much cash you need over a six- to eight-month period, including all the irregular payments that may fall during that period. Then you can then revise your savings goal closer to the six- to eight-month saving target, acknowledging your success when reaching the three-month target and the five-month target and so on, in keeping up your motivation and interest.

The other critical point in establishing your emergency fund is where to keep it. Since it is an emergency cash fund, it needs to be where you can access cash fairly rapidly when an emergency does arise. Yet, it is important to dull the temptation to tap into the fund for any other reason than for emergencies. For sure, the fund should be held in a separate account from your normal spending, say in a separate bank account.

The emergency fund account should not be easily accessible even by a cheque, or credit/debit card. If these are linked to the account, then the cheque or cards should be hidden away, only to be accessed for an emergency. A credit union account is more attractive as it provides access to annually compound interest growth at significantly better interest rates than the minuscule amounts currently offered by the commercial banks. 

• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: [email protected].

This column is sponsored  by the Barbados Workers’ Union Co-op Credit Union Ltd.