Being given a big medical bill for that unexpected trip to the dentist or (god forbid) losing your job are just some of the possible setbacks in life that we may face in life. How do we combat such emergencies, you ask? By having an emergency fund ready before you’re met with such setbacks.
Emergency Fund: What Is It?
An emergency fund acts as a buffer during one of life’s setbacks, ensuring that you can still provide for yourself or loved ones without taking loans or additional liabilities.
Requirements For An Emergency Fund
An Emergency fund must have these 2 major requirements:
1. It must be easily accessible.
When you’re in a dire need of some money, be it to pay that big medical bill or just buying a meal after you’ve lost your job, the last thing you would want would be waiting for weeks to make a withdrawal.
Hence you want your Emergency Fund to be easily accessible like a quick withdrawal from the bank, the atm, or in plain cash.
2. It must be Reliable.
It must be available when needed and be held as risk-free as possible. This means no high yield investment portfolios that ties your money up. This is the emergency fund we’re talking about.
Why Is It Important?
Providing you an assurance that you would still be able to provide the bare necessities for yourself and your loved ones, assuring that you still are able to afford to have 3 square meals a day.
Ensuring that you still have financial stability by being able to meet your current liabilities without the need to take up further loans, giving you a peace of mind that you’re still able to pay your mortgage, rent or car loan.
3. Damage control
An Emergency Fund allows you some degree of damage control to minimize the financial blow to your savings, investment, and other assets.
I Have Insurance Do I Still Need Emergency Funds?
Yes, unless your insurance covers the emergency, such as hospitalisation fees where it can act as a form of an emergency fund.
The truth is not every aspect of your life is insurable, so that’s where you’ll need to have an emergency fund.
Can I Rely On My Savings As Emergency Funds?
Not really, we recommend that you have your emergency funds and savings separated because we all are guilty of not keeping tabs on our expenses and we tend to lose track of them easily as well.
The last thing we want in an emergency is to lose track of our expenses in an emergency situation and start using up all our hard earned savings unintentionally.
So keep your long term savings separate from your emergency fund and you’ll be fine.
How Should You Set Aside For your Emergency Fund?
Follow these 3 steps from to know how much you need for your Emergency Fund:
1. Your Total Monthly Expenses.
First off, You must know how much you spend in a month. You can find out your number by using an app to track your expenses, or calculating your receipts at the end of the month.
Pro tip: You can round off the number in your checking account by transferring the balance at the end of the month to your savings account, and starting afresh from there. That way, after putting aside your savings, you’ll be able to figure out how much you spend that month and use that as a gauge.
2. Decide How Many Months of Reserve You Need.
It’s recommended that you have a reserve that is at least worth 3 months of your monthly expenses. In case we’re confused, that’s expenses, not your salary. We hope you don’t spend your entire salary each month!
3. Determine How Much to Put Aside Each Month.
The recommended amount to put aside monthly is between 10% to 20% of your monthly income, but this isn’t a hard and fast rule. Put aside what you’re comfortable with.
If you have to spend more because of your family, then perhaps 5% would be an easier number for you. If you’re living alone and don’t have much responsibilities, you can consider putting more money (30%?) towards your emergency fund so you can reach your 3 month goal quickly.
Saving money may sound tedious and boring, but it is an important aspect of our lives that shouldn’t be neglected. What are your tips on saving money? Do you have an emergency fund or do you think it’s unnecessary?
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