Emergency Fund - Part 2

What happens in the case of an emergency? – Planning for the rainy day....... Continued

How to create an emergency fund

4   The next thing to do would be to open a savings account. Please note that banks do not have dedicated accounts for emergency funds. You would have to search for a bank that offers the highest interest rate on a savings account. Another point to remember is that the objective for an emergency fund is not to create wealth but instead to preserve wealth, therefore you would have to look for a low risk, investment option.

5   The final thing to do is to have a direct debit in place with your bank to ensure that you are consistent with your deposit.

Benefits of creating an emergency fund:

A vital point is that an emergency fund reduces the need to use high interest debt, such as credit cards as a last resort. There are many studies that show that those without emergency savings are more likely to accumulate debt.

Furthermore, this is life anything can happen at any time. There could be a worldwide credit crunch, birth of a child, natural disaster, death, etc. It is better to be prepared than to be sorry. 

On a final note consider having an accountability partner such as a personal finance coach or financial planner to ensure you keep up with your commitments.

The truth is that everyone has an emergency fund; the difference is that you are either earning interest or paying interest.

Key Tips for opening an emergency fund:

·         Open a separate account with a bank that you do not use regularly.

·         Make sure you open a savings account and not a current account.

·         Resist the temptation to dip into your emergency fund.

·    If you are married speak to your spouse and agree to resist the urge to dip into your emergency fund unless there is a real emergency.

·         Define what a real emergency is.

·         Increase your deposits as time goes on.

·       Once you have reached your desired goal, you can either move the goal post by increasing your emergency fund or start to work towards achieving another financial goal.

·         Consider the option of having both a short-term and long-term emergency fund.

·         Keep your debit card in a place that is not easily accessible.