Building an emergency fund
It never happened to you, it only happened to your friend or colleague. Despite this, your stomach is still knotting up and you can’t shake the feeling of impending dread as you read the words: "I couldn't even afford to pay my electric bill this month".
You tell yourself that it won't happen to you. Maybe there's a chance it will, or maybe not. You think you're smarter than the rest and even though you haven't been in their shoes you're confident you'll be fine.
Except for the one time it did happen to you. You were down to your last few dollars, so much that you were eating on borrowed money and credit cards. It was a terrible mindset to be in and it took a long time to get out of. Despite this, there's an uneasy feeling that something will go wrong before you save enough - whatever that amount is - that will throw everything off track again.
You need to get out of that mindset and start building an emergency fund. The good news is there are a lot of ways to do so and there's even a little fun involved. Unfortunately, this isn’t fun in the way you expect, but it is in the way I'm referring to.
Building an emergency fund isn't about saving money for that one time it happens - it's about saving money for when something does, hopefully not at all times - happen at all times. As such, building your emergency fund isn't something you "do". You need to be able to create and maintain your account at regular intervals without fail and that means you need a system.
Knowing what system you want to use is the easy part. The hard part is actually executing it. The good news is that there's enough variety to keep things interesting, and with a little preparation on your end you can get started today.
Two Types of Emergency Fund Accounts
There are two main variations of emergency fund accounts, each with their own merits and disadvantages. Personal funds are for a single person, whereas company funds are for an entire company or business unit. For the purposes of this article I’ll refer to them as personal and company funds, but this isn't an official term - it's just what happens in my experience.
Personal Funds Personal funds are what you might call a "monthly" fund, meaning that you can typically access it once a month. This is the most common approach and works well for those who have to get in the habit of creating an account every time they get paid, but want more flexibility when it comes to accessing their funds. You might opt to have your salary automatically deposited into this account, so that you're not tempted by other options. But there will be times where you'll need to access your money on a regular basis - at these times having an ongoing account becomes advantageous. If you're just starting out, this might be the right approach for you since it will save you from having a large amount of money sitting in your bank account until the time comes to use it.
Company Funds Company funds are what I refer to as an "emergency" fund. They're essentially a collection of all of your company's cash at any given point in time. You are free to access this money as often as necessary, but there will only be one withdrawal allowed per month and that withdrawal is only for emergencies. In other words, if you need to "borrow" money from your company at any given point in time, this is the account you'll use. Company funds are therefore a good choice for those who don't desire the flexibility of personal funds, and who need to stick to their monthly budget. While you won't be able to access money as frequently as you would in a personal account, it's much more stable and reliable.
Some Things To Consider
As with any type of financial planning, there are things you’ll want to consider before setting up your system so that it works best for you. Here are some of the more important points:
Can I Withdraw Money From My Personal Account? Can I withdraw money from my company account? If you want to keep your personal and company funds separate, you need to know how to access each one. Beyond the initial creation or deposit of your money you should have only one way of accessing it. If you can only access personal funds through a company account and vice versa, then this might be a good way to keep things organised for you. Will It Be Auto-Deposited? You need to decide if you want auto-deposit enabled on your account or not. If you do, make sure you're not automatically putting the money in a separate account with another bank. If you don't, consider having the money auto-deposited - it'll save you from messing up. How Often Should I Transfer? This is something that's entirely up to you. You could transfer every time you get paid, once a month, once a quarter or even once a year. Just be consistent and stick to it. Will It Be Auto-Withdrawn? Will your company automatically withdraw the money from your account? This is entirely up to you - if you want to have the money available for that one time it happens, you might have to disable auto-withdrawal. The amount of money at hand will determine this decision (unless you want a much higher amount with which to start).
How To Set Up Your Account
Now that we've covered all of the shoulds and shouldn'ts, here's how to actually set it up. As I mentioned earlier, there are two main variations: personal or company funds. You should decide which is the right choice for you and then go about setting things up accordingly.
Personal Funds Personal funds are a good choice if you want the flexibility of accessing your money periodically, but don't necessarily need the reliability of an ongoing account. In short, they're best for those who can't build up a regular deposit into their account. You should be able to open and close your account whenever you please - but that's not to say they'll be easy to access. They'll still take work as you'll need to get in the habit of setting things up before every pay day (or at least before each pay period) so that you don't find yourself with an empty bank account by the end of it all.
Company Funds Company funds are best for those who need security and stability over convenience.
Conclusion
Now that you know what type of account you want to use, it's time to get started. Some will find it easier than others to have an ongoing account, but the idea is that this system helps you stay on top of your finances and therefore avoid any money-related emergencies. It also forces you to tackle small amounts of debt each pay day as opposed to having one large sum saved up for once in a blue moon emergencies.
Even if you choose not to use the same system that I've outlined above, the main takeaway from this article is that creating your emergency fund right away is well worth the initial effort. You'll be glad you did!
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