You must have undoubtedly heard the advice that you ought to have an emergency fund. Experts may vary with their opinion on money philosophy, but they all pretty much agree that having a set amount kept aside as an emergency fund is an important segment to lead a healthy, financially stable life.
Does your bank account make you feel like you have enough time to formulate a financial plan or does it prompt an enormous amount of financial stress?
An emergency fund is intended to provide coverage during a financial shortfall when an unexpected incident occurs. At this time, your emergency fund can back you up in serving as a place to go to when you find yourself short.
The thought about having an emergency fund is, it must be reliable, and it needs to guarantee holding your investments tight. You don’t know what’s going to happen; no one surely wants to live at the edge of life’s twists and turns. To avoid this, build a safety net between yourself and your life.
How big should your emergency fund be?
The more stable you find your income and household to be, the less you need in your emergency fund. If you find yourself to be in the bracket of two-income household or if you have had a steady job for years, then probably a fund worth of three to six months of your expenses should suffice the need.
Where should you keep your Emergency Fund?
Since emergency funds must be accessible, it is best advised to save it in your savings account at your bank account. One thumb rule here is, your emergency fund needs to be liquid, meaning it needs to be handy to get it quickly. This way, you can easily make payments to your doctor, mechanic or anyone. If possible, it is always safe to keep a short-term and long-term fund separate as an emergency fund. Your short-term fund needs to be accessed easily meanwhile that your long-term funds come through. Besides keeping cash on hand, ensure having debit card and check-writing facilities attached to your emergency funds.
Here, the most challenging aspect of building an emergency fund is contributing a large sum of money which needs to be untouched. The good part is, you need not contribute to your emergency account all at once. It can be built over a period of time, what’s important is to get started and staying consistent till the time you don’t reach your fund goal. Here’s a quick guide to build your emergency fund:
- Break your funds into short-term and long-term
- Make your deductions automatic
- Start small
- Fill up your account with the dividend earnings
- Consider an alternative to over-fund your emergency savings
- Celebrate milestones
Conventional theories may recommend that the bigger your emergency fund is, the better it is. However, recognize the fact that in the process of over-funding your emergency funds, you might be hurting your bottom line.
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