Living in the UAE, money often leaves your pocket just as quickly as it comes in. That’s why, whether you have lost your job, your car has broken down or you have a medical emergency, you need to make sure you have funds to fall back on.
An emergency fund is there to cover the cost of any surprise events that may happen, it is designed to help you absorb unexpected and extraordinary expenses during a financial emergency. As a result, it shouldn’t figure into your regular expenses.
However, an emergency fund should never be used as a replacement for your retirement or your child’s college education; these should be planned, created and saved separately. Most importantly, you should only ever use an emergency fund when there is an emergency. It should only be used for ‘needs’ and never for ‘wants’.
But how are you meant to start building the fund along with your other financial obligations? Quite often, people who don’t have an emergency fund see the idea of having to save up money that they have no intention of spending to be pointless.
In fact, it’s the exact opposite. Having an emergency fund allows you to have flexibility with your finances. You don’t have to panic if you need to pay for major maintenances on your property or if anything should happen to you or your spouse. Instead of having to find some way to pay bills with money you don’t have, like taking out loans or credit cards, you can just bay the bill – no worries.
So what are the first steps to building up an emergency fund, if you don’t already have one?
How to save
First, decide what your goal number should be. Many people decide to put in as much money as possible straight away, but then find it hard to reach their savings goal. Instead, it makes sense to start off small and then you will not be overwhelmed. If you set your goal at the beginning for AED 2,000, it should be a number you can reach in a few months and yet it’s an amount that can make a difference. If your financial situation allows you to put aside more, then let yourself do so. It should challenge you to save the right amount of money, but not so much that you struggle.
However, sometimes there are more pressing finances that need to be attended to first, like debts or paying back loans. If you are trying to get out of debt, then maybe start the fund at a smaller number like AED 1,000. This can be classed as a short-term emergency fund, which can be your go-to place when you have an immediate emergency. Then, once you are debt-free, continue to build up your emergency fund further.
But if you find that, at the end of each month, you hardly have any money to spare, then it may be time to go through your expenses and see where you can make cuts. This can help accelerate your savings. If you can live without a few brunches or meals out, then choose to redirect your money into the fund. For example, if you can save AED 100 each month, by the end of the year you would have saved AED 1,200. And you may even find that you can trim more expenses than you previously thought. And once you start putting aside small amounts each month, the fund will grow quicker than you may think.
One way that could help maximise how much you save each month is setting up an automatic transfer with your bank. As soon as you receive your salary, treat saving for the fund like paying for monthly recurring bills. And having funds automatically transferred into another account before you have a chance to miss it will make the saving process easier.
With that in mind, where is the emergency fund meant to be stored? Well, your emergency fund should be easily accessible, but not so accessible that you’ll be tempted to make withdrawals for everyday spending.
Where to save
Setting up an interest-baring savings account will help your fund slowly grow through interest rates. If you decide to put your money into an account through a different bank that you normally do business with, it gives you the opportunity to shop around at the best rates, particularly if you are going to leave a hefty balance in there.
Emirates Islamic’s E-Savings Account requires no minimum balance to open the account but can give up to a 2% annual return. Emirates NBD’s Mudaraba Savings Account requires a AED 3,000 minimum balance to be maintained and you can gain up to 1.35% profit if the balance is maintained.
Another bank account that could be beneficial is a fixed deposit account. As the name suggests, you need to deposit your cash for a fixed amount of time, so if you are disciplined enough to put away money monthly than a fixed deposit account is worth considering. However, if you need to access the money before the minimum tenor finishes, then the chances are you will be penalised for accessing the money.
With that in mind, some banks are flexible with terms – accounts with names such as ‘unfixed deposit’ or ‘flexi’ allow you to take out money early without being financially penalised, but the banks do make it clear the money withdrawn will receive a lower interest rate. Emirates NBD’s FlexiDeposits Account requires a minimum deposit of AED 10,000, up to a 2% annual return and allows customers premature withdrawals with unlimited withdrawal frequency. That could be useful in the event of an emergency.
Emergency funds might require self-restraint. But being prepared for the unexpected will add a sense of calm to your life.
Ready to start saving? Click the button below to compare savings accounts from the UAE’s leading banks!I want to build my emergency fund!