Zaid is an employee of a financial company who gets a very good salary and lives a good life because his work is relatively stable, and he had never felt the need for an emergency fund, but later something happened that he had never expected; the financial crisis made him lose his job to become without a regular salary, and even worse without any personal savings.

Dear reader, shall you allocate part of your money to an emergency fund? Can you imagine your fate in case you lost your current job? How affected are you by the business disruption caused by Covid-19 crisis? Imagine that you have lost your source of income for three months, what will be your fate?.

In this volatile world where we continuously face unexpected emergency situations, we should not leave the estimation and planning of our financial conditions to chance, so we should aim to create a personal savings fund to face emergencies and unexpected events..

It can be said that Emergency  Fund  is an amount of money that is allocated to face unexpected sudden circumstances, such as job loss, sudden illness, or even shattering of the house ceiling, and of course it does not include buying new furniture or traveling with friends.. 

In a previous article, we provided some information about the emergency fund, and today we will provide you, dear reader, with the steps that help in creating an emergency fund from scratch..

Read also: 5 Basic Information About Emergency Fund

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 Why Do We Need an Emergency Fund?

Creating an emergency fund is an essential part of developing a strong financial plan as we are always exposed to unexpected events such as job loss, sudden illness, or repairs to the house or car with unexpected amounts, so we must take the necessary precautions so that these events do not lead us to financial distress. Individuals who save for emergencies  are better able to face and overcome crises without resorting to loans. .

Why Do We Need an Emergency Fund 1

Why Do We Need an Emergency Fund 1

Greg McBride,
Chief Financial Analyst at Bankrate, says:

“Unplanned expenditures are unexpected, so the sooner you are prepared, the better you will be when an inevitable event occurs”.

How Can I Start Creating an Emergency Fund?

First: Track Your Expenditures

The first step in this path is to know the amount of your monthly expenditures. It is very important to know where your money goes. This will help you figure out ways to cut costs and keep additional savings. Try to record all the money you spend regularly whatever its amounts, this step will spontaneously increase your awareness of managing your money.

Second: Distinguish Between Fixed and Variable Expenditures

When talking about saving, it is necessary to distinguish between fixed and variable expenditures. Fixed expenditures such as house rent, university tuition, etc.  cannot be reduced in the short term, so you cannot save or cut it. Whereas variable expenditures are the expenditures that we can save such as expenditures allocated to buying clothes or going out with friends, or unplanned expenditures, this part of the income is what can be saved or reduced in the short-term.

Read also: 16  steps to building financial awareness

Third: Draw A Plan for Monthly Spending and Saving

After tracking monthly expenditures and distinguishing between fixed and variable expenditures, it is now necessary to re-examine these expenditures and determine what can be saved from it or managed better, then you have to set a fixed amount and put it in the emergency fund, this amount is determined in light of your monthly income and your fixed expenditures. Try to minimize variable or unplanned expenditures as much as possible, especially in the first stage of creating savings fund.

Fourth: Determine Your Time Plan

After determining what you can save monthly regardless of whether the amount is small or large, this will be a very important step in the way of financial security. The emergency fund should cover your necessary expenditures from 3 – 6 months, depending on the stability of your financial and employment situation. Therefore, determining the necessary expenditures is what determines the primary objective of the savings fund. This fund will not cover entertainment expenditures in the event of resorting to it, so you will not take from it to buy a new phone or travel with friends, this fund has a clear goal which is the necessary unexpected expenditures.

Let us suppose, dear reader, that your necessary expenditures equal 600$ per month, and you have a stable job and financial position. In this case, the savings fund should cover the expenditures of 3 months at the very least, so your primary objective will be: The primary objective of the emergency fund= 3*600= 1,800 $.

Of course, saving this amount considering your income will need a relatively long period, which depends on the amount that you will save each month. Assuming that you will save 50$ per month, you will need 36 months, i.e. three years, in order to form the cornerstone of the emergency savings fund, this is a normal thing and you should not be frustrated because saving  is a destination and a lifestyle, not a temporary case that ends with the end of its cause .

Read also: How Can Financial Saving Be A Lifestyle?

Fifth: Stick to Your Plan

Once you finish creating your plan, be sure to stick to it. This is probably the hardest part of saving for an emergency fund or any other financial plan in general, but the more realistic your goals, the easier it will be to stick to the plan. One way to make it easier for you to stick to a saving plan is to enable automatic transfer to your savings account.  Dear reader, make sure to separate the savings of emergency fund from any other accounts or savings, and do not approach them except in extreme emergencies.

Read also: Types of Bank Deposits, Where Should I Save Money ?

Sixth: Keep Saving

When you achieve your goal for the savings fund, don’t stop and keep saving, you will feel relieved and financially secure, and will not be worried about any sudden event.

Creating an emergency fund is a necessary building block for achieving long-term financial stability. Anyone can create this fund; you just need the right objectives and plan.

Read also: How to Calculate the Banks Interests?

When to Use the Emergency Fund?

On any day, dear reader, you may face some events that may be inevitable, and you may start thinking about resorting to emergency savings, but before that you should answer three questions to make sure that what happened is really an emergency that requires the use of your savings fund.

When to Use the Emergency Fund

When to Use the Emergency Fund

You must answer these questions: 

  1. Is what happened unexpected?
  2. Is it necessary?
  3. Is it urgent and must be done immediately?

If your answer is “Yes“, then what you experience is considered an urgent matter that requires the use of your emergency fund. If your answer of some questions is “No“, then you should not use these savings, and remember that sticking to the plan is the most important part of it.

Make sure to save your money in a place that is not permanently accessible, but rather save it in a place that can be accessed when necessary.

Read also: The 6 Most Common Financial Mistakes We Make

In conclusion, dear reader, I would like to remind you that creating an emergency fund is not a luxury, but rather it is necessary because we live in a volatile world and face its challenges and surprises every day. Emergency fund will protect you from falling into the debt trap, and its subsequent psychological stress. Therefore, start from today in applying the steps of creating an emergency fund, as it is a very important step in achieving financial stability.