Creating an emergency fund is fundamental within the concept of financial education. Unfortunately, it’s not easy, especially when you are on a limited budget. However, you still need to create an emergency fund, no matter how tight your budget is. Because life these days is too complex and too risky for you to bet you’ll never need it.
This article will outline a few steps to start building your emergency funds from scratch. Check it out.

1. Record your income and expenses

Keep track of all family expenses for at least three months. Do the same with your net income (already discounted Income Tax, deductions, contributions, etc.). If you need help with that, use this super free budget tool by Moka.

2. Separate the important from the superfluous

Now, with great visibility of the family’s financial situation, bring the family together and do an in-depth analysis, identifying the items you can cut. Just be careful not to make too many cuts to the point of attacking the family’s lifestyle.

An interesting thing to do is list your family’s priority expenses in ascending order. This helps a lot to separate the important from the superfluous. And if you have debts, check with the family if you really need to keep them.

3. Set a monthly amount to be saved

With some expenses cut and some money left over from smarter prioritization, you can start saving. Set a fixed monthly amount to save or a percentage of household income to start saving. Even though this amount is small, it is important to take this step to establish the investment routine.

4. Use cashback credit cards

You can easily build an emergency fund by using cashback credit cards to earn rewards.

Many cash-back cards like the Scotia Momentum® VISA* Infinite card and SimplyCash Preferred Card from American Express would offer cash back of 4% or more. And once you’ve earned those bonuses, you can transfer the money directly to your emergency savings account.

The cards continue to earn money as you make purchases which you can then save. Nonetheless, this method only works if you pay off your cards on time. Accruing credit card interest on your purchases can hurt your finance.

5. Be careful not to over save

Keep your emergency fund from taking up too much of your savings.

Basically, a financial reserve is money you can access quickly in case of an emergency. This means you are most likely saving it in a low-interest account, like a savings account. That’s why, once you reach your ultimate goal, you should stop contributing to that account. If possible, invest it in a retirement account where it can begin earning money on its own – that way, it can yield more interest with time.

In Conclusion

Success in creating the emergency fund and, consequently, in the habit of successful investing is closely linked to two characteristics: discipline and persistence.

It may be tempting, but don’t use your emergency fund for any other purpose. Unfortunately, a typical and unpredictable situations can happen, such as the crisis caused by the new coronavirus pandemic. Emergency funds are essential, especially if you have other people who depend on your income, such as children. The fund is the amount you need to get through a difficult or unanticipated period.