The majority of personal finance gurus concur that after taking care of your essential needs, you should set up an emergency fund. Why should creating an emergency fund be a top priority ? example…
The windshield of your car is broken by a burglar, your son becomes ill, or your water heater overflows. Life is full of unforeseen surprises, many of which cost money. People who don’t have any savings and live paycheck to paycheck are vulnerable to these minor emergencies. Sometimes a small issue grows into a major one because the victim wasn’t ready for potential disaster.
Some of my acquaintances think having emergency cash is useless. They’re mistaken. Perhaps you don’t need emergency finances if you’re wealthy. These friends aren’t wealthy though. Emergency reserves serve as a kind of self-insurance for the majority of individuals. They are a proactive method of guarding against unfortunate circumstances for you and your family.
Why Creating Emergency fund should be your top priority ? based on Data :
Car Accident = Based on where you stay your chances of getting into car accident is ranging from 4% to 20% .
Health Emergency = Based on your age this probability is from 0.6% to 15% based on your lifestyle and health condition.
Emergency fund Definition
An emergency fund — or “rainy-day account” or “safe and sound money” or whatever you’d like to call it — is a chunk of change set aside specifically for the unexpected things life throws your way. It’s not to be used to buy a new car. It’s not to be used for a vacation to Paris. It’s not to be used to remodel your bathroom. It’s for use only in case of emergency: a tree falls on your house, your youngest daughter breaks her arm, you lose your job.
How much you should save in emergency fund?
Although personal finance experts concur that emergency funds are vital, they disagree on the appropriate amount. Just a few suggestions are provided below:
According to David Chilton’s argument in The Wealthy Barber, it is advisable to have sufficient insurance to cover major emergencies and to set aside between $2000 and $3000 to cover minor emergencies and costs that insurance won’t pay for.
“Your emergency reserve is your financial cushion in case something goes wrong and you lose your job or need access to money immediately,” Robert Pagliarini says in The Six-Day Financial Makeover.
You should have at least three months’ worth of expenses in your emergency fund. You can pursue other objectives after you have enough money saved for the cushion.
Jean Chatzky suggests three to six months of living expenses in You Don’t Have to Be Rich.
Vicki Robin and Joe Dominguez in their book, In Your Money or Your Life
Begin modestly. Anything is preferable to nothing if you don’t currently have a rainy-day fund. Reserve $500. Or $100. Or $20. Build up this buffer over time until you have $1,000 or $5,000 set up for emergencies. If you actually have six to twelve months’ worth of living expenses in the bank, you’ll ultimately sleep better. Knowing that you won’t immediately lose your home if you lose your job is consoling.
How to Create Emergency fund ?
Starting an emergency fund is easy. Anyone can do it. Here’s how:
- Select a good bank. for me local credit unions and community banks are a good options , but I also like high-yield savings accounts at online banks. (My emergency fund is at DBS bank, although there are plenty of other options available for you to choose from , based on which country you are located in.)
- Build a buffer. If you’re still in debt, it’s not a good idea to stick a lot in savings. You should set aside few hundreds bucks like $500 or $1000 to deal with annoying emergencies like a car that breaks down, but the rest of your cash should be thrown at your debt.
- Resist temptation. When you have a big chunk of change sitting in the bank savings , unused, it can be quite tempting to use it for other things. Resist the temptation. Use your emergency fund only for emergencies ( real ones ) , else you defeat the purpose.
- Try to Save more. As your debt dwindles, and as you get better control of your finances, build on your emergency fund. Pick a achivable number that helps you sleep at night. For me, that number was $15,000. That seemed like a lot of money to me (and still does!), and if anything disastrous happened, it would help me survive for a long time. And get me out of any difficult situation ( most of them ) unless i smash into someone’s Ferrari .
Finally, it’s a good idea to store your emergency cash in a location that’s not very accessible. (If you know you have the self-control not to spend the money for other purposes, disregard this piece of advise.)
For instance, you might open an account at a bank outside of town. Alternately, put the funds into an online bank. Alternately, place the funds in a certificate of deposit. Keep your emergency cash separate from any debit cards you may carry. You’ll still have access to the money when you need it, but you’ll have to think twice before withdrawing it.
When you should use money from Emergency fund?
But what exactly is a crisis? I’ve given this question a lot of attention lately since it’s intriguing. How do you decide what situations are emergencies and what are not?
Of course, sometimes the solutions are simple. Florida vacations are not emergencies and shouldn’t be paid for out of your emergency fund. A new video gaming console is not necessary, nor are new boots. On the other side, purchasing new transportation is necessary if your lone car is totaled. Alternatively, your son’s medical costs would be an emergency if he broke his leg.
What about everything in between, though? Imagine if your PC crashes. Is that a crisis? Or perhaps you should just visit the internet café? What if the roof of the garage begins to leak? What happens if you get a surprise dental bill?
In the end, I believe the most important thing is for you to decide what you can and cannot do with your emergency fund. But once you make that choice, don’t budge.
Conclusion on Emergency fund !
I can speak from experience when I say that it can be upsetting to watch a sizable sum of money sitting untouched for weeks, months, or even years. However, I also know from experience that having an emergency fund can help you avoid financial calamity in the event of a natural disaster (or any other type, for that matter).
According to studies, people who don’t have emergency reserves are more prone to rack up debt. By serving as your own self-insurance, your emergency fund protects you from minor catastrophes. Your financial plans won’t be thwarted by a single unanticipated incident if you have a cash reserve, unless it’s a major one.
Do check out our chart section if you are into investment .
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