In a perfect world, you would never have to replenish your emergency fund. Once you hit your target balance, it stays at that figure, a permanent backup to your budget.
In reality, your emergency fund fluctuates with every withdrawal you make, and your balance plummets after you rely on it to get through a financial rough patch.
It won’t regain its former balance until you add more money to the pot.
So, your priority is to repay this money as soon as you can, which is no small feat!
That’s where this guide comes in.
Keep scrolling to find out how to prioritize your emergency savings, and what to do if you run into an emergency fund before you manage to refill your fund.
Prioritize Your Savings
Repaying your savings is important, but it shouldn’t come at the cost of your enjoyment of life. Balance is a far better way to approach your finances, so you should anticipate some splurges while prioritizing the essentials.
But just how much should you spend on those splurges and how much should you save? This can be a tough question to suss out on your own, especially if you don’t normally budget.
If you aren’t sure where to draw the line on fun spending, the 50/30/20 method gives you an idea. This budget separates your spending into three categories —needs, wants, and savings — and assigns them a portion of your paycheque.
Essentials take up 50% of your net income, while your wants snatch up 30%. Your savings should take 20% of your take-home pay.
You may increase your saving’s share if you’re behind on your emergency fund. If you decide to bump your savings goal to 25%, take this 5% from your wants, spending just 25% on frills.
Pay Your Bills on Time
Budget with your due dates in mind so that you’re never late transferring funds. Paying your bills on time keeps your accounts in good standing, which can help you build a good credit history.
Honing a good credit score is important when you don’t have a lot of savings. That’s because you’re more likely to need a personal loan if an unexpected expense comes your way while your savings are still low.
Applying for a personal loan or line of credit goes a lot smoother when you can boast an impressive score, although it’s not strictly necessary to qualify.
If you can’t boost your score the next time you need to borrow, you might be able to unlock more favourable terms with the help of a loved one.
If a friend or family member is willing to be a cosigner, you can piggyback on their financial good name to qualify for a greater selection of loans.
When do you need a cosigner? It depends on the type of loan you’re looking for and your current credit score. Generally speaking, cosigner loans are for people with no credit or ultra-low scores.
If you can’t get approved with any other personal loan or line of credit, you can give cosigner loans a try.
Anticipate Your Expenses
A true emergency can be next to impossible to predict with any accuracy. But these surprising expenses aren’t the only things that can upset your finances.
Some entirely predictable expenses can catch you off guard and feel like a genuine emergency.
Think of those quarterly or annual memberships, like your auto insurance, anti-virus program, or property taxes. Many of these services charge you automatically, just once a year. With an annual charge, these accounts aren’t top of mind for most consumers.
If you don’t remember the renewal date for your irregular expenses, you can wake up to a surprise on your credit card bill.
You can eliminate this nasty surprise by looking at last year’s spending.
Review your financial statements carefully to catch infrequent, irregular, or occasional spending. Make note of their renewal date, so you can put in a reminder before it arrives.
Affording these large renewals can still be challenging, even when you know their due dates. To help you handle the cost, you should also consider adding each annual expense as a line in your monthly budget. This way, you can set aside a little bit of cash each month without really feeling the pain.
Over the year, these contributions will grow until they’re big enough to handle your annual expenses with fewer hiccoughs.
If you decide to give this tip a try, send this money to a different account than your chequing account.
Keeping this money out of your chequing account prevents you from accidentally spending the money you worked so hard to save.
Stick with It!
Rebuilding your emergency fund from scratch isn’t easy, but it’s well worth the trouble. Stick with these tips and celebrate the little victories you make along the way.
They’ll help you improve your financial health.