What is an “ EMERGENCY FUND ”?
An emergency fund is a stockpile of cash that you have saved for sudden, unexpected or unforeseen financial expense that comes up in your life. The defining feature of a financial emergency is that it is difficult to predict. You cannot be certain when or if such an emergency will arise and how much it will cost. These emergencies include a sudden illness, an accident, a lay off or a pay cut or a death in the family. A financial emergency is different from expenses that occur on a day to day basis. It is also different from expenses which occur less frequently such as maintenance costs/replacement costs of vehicles and household equipment. Having an emergency fund helps you to cover the unexpected expense without having to go in to debt.
How much should you save?
The answer to this question will vary depending on your personal financial situation, the type of job you have and whether you have dependents or not. Typically, financial experts advise you to save at least 3 to 6 months of expenses in your emergency fund.
However, if you have a family or elderly parents whom you support, (or sometimes even pets) it is advisable to save more. If you work in a field where it is difficult to get a job or have fewer vacancies or requires specialized knowledge/ certifications and you know that you maybe unemployed for a longer period time, it is advisable to save at least 8 to 12 months of expenses in your emergency fund. It is important that you have the emergency fund in an account which has high liquidity. It is essential to have easy access to your emergency fund in case you need it.
Importance of having an Emergency Fund
The current unpredictable global economic situation has demonstrated to us, the value of having a stockpile of cash to cover emergency situations. Many of us face an uncertainty about our jobs. The best thing about having an emergency fund is that it gives you peace of mind. Knowing that you have a significant amount of money in savings for such emergencies, gives you a great deal of peace of mind. It takes away the stress related to coming up with money to pay for daily expenses and helps you to find the best solution for the problem at hand. Having an emergency fund in place will make any financial emergency in to an inconvenience instead of turning it in to a complete financial disaster. If you do not have an emergency fund you will be forced to borrow money to cover your regular bills through credit cards or pay day loans. The high interest rates attached to these debts will make it even harder for you to get back on your feet financially. An emergency fund will also help you maintain your standard of living, give financial stability to your family and stay current on your bills.
How to save money for an Emergency Fund
- Live a minimalist lifestyle for a few months until you save up enough money for an emergency fund.
- Set up an automatic transfer from your salary to a separate emergency account.
- Sell unused items that you have around the house online.
- Take up a side job for a few months until you save up your an emergency fund.
- Savings challenges – eg:-Saving coins, 52 week savings challenge
- Take additional hours at your job and directly put that extra money towards building your emergency fund.
- Save tax refunds or bonuses from your job
It is important to understand that it will take some sacrifice and discipline to save at least 6 months of expenses. However, these sacrifices will be temporary, and the benefits of having an emergency fund will greatly out weight the minor inconveniences that you will have to face in the short-term.
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Disclaimer - It is important to note that the above tips are my personal views and opinions on money management. These tips should not be considered as professional financial or legal advice. This information is general in nature, may not be suitable to your individual, financial or legal situation. Always consult a competent and qualified Financial Professionals and a Legal Professional before you chose any investment, and, do all necessary research and understand the risks involved before you purchase any financial product.
11 SIMPLE STEPS ON MONEY MANAGEMENT
BASIC STEPS TO CREATE A BUDGET
Disclaimer - It is important to note that the above tips are my personal views and opinions on money management. These tips should not be considered as professional financial or legal advice. This information is general in nature, may not be suitable to your individual, financial or legal situation. Always consult a competent and qualified Financial Professionals and a Legal Professional before you chose any investment, and, do all necessary research and understand the risks involved before you purchase any financial product.