Determine how much money your emergency fund should have
Having an emergency fund is important but knowing how much it should have is imperative.
What is an emergency fund?
An emergency fund is simply cash set aside that you do not need at the moment.
Assume in the near future something happens to your job and maybe you are unemployed for 3 months. In that kind of scenario a good emergency fund would help you get through the turbulent times until you secure a new job.
Having an emergency fund requires discipline and dedication. Sometimes people make the mistake of thinking that emergency funds are for treating friends and partying.
On the contrary, the funds are specifically stashed away to cushion you in case unforeseen incidences occur. Some incidences may require a certain and consistent amount of money to sustain you for a given period of time. Therefore, the bigger your emergency fund the better.
How much money should you have in your emergency fund?
3 months.
The amount of money you should have in your emergency fund varies depending on your monthly expenses and how long you want the fund to sustain you.
If you spend $2000 per month then the minimum you would need for a 3 month emergency fund safety net is $6000.
6 months.
Three months is the minimum, barely recommended duration that an emergency fund should get you through. For better peace of mind however, it is recommended that you stash away enough cash to get you through 6 months of turbulence.
In this case $12000 would be the ideal amount given a monthly expense of $2000.
12 months.
Nevertheless, for you to completely feel relaxed and to fully live your life worry free, an emergency fund with a year’s expense is highly recommended. This way you can get through any challenges life throws at you without a care in the world.
$24000 is the perfect number given the example of a $2000 monthly expenditure.
Where should I keep the emergency funds?
- Separate savings account.
It is important to distinguish an emergency fund from an investment in a stock market or bonds. An emergency fund is cash that you can access fast in case of anything.
The best place to save your money would be in a designated savings account. With that you can easily access the money when you need it without fines. - A safe.
Another place to save the money would be in a safe. Investing in a safe would help you stash away money easily and access it faster than a bank transaction.
There are also no withdrawal fees involved since the safe will be in your house. The only down side to a safe is that you have to be physically present at that particular location to access the cash.
Unlike a savings account where you can access it from your mobile devises, safes are limited but convenient in their own ways. - Fixed deposit account.
This option is only recommended for people who cannot be disciplined and constantly find themselves misusing their emergency funds.
A fixed deposit account could be a better option to a regular savings account.
With this account you have to save money for a specific period and if you withdraw before that period you will be fined.
Why is an emergency fund important?
- Safety net when things get out of hand.
- Gives you peace of mind.
- Helps you avoid loans and keeps you out of debt.
- Earns interest if its saved in a bank account.
- Complements your investments.
- Teaches you financial discipline.
Conclusion
During tough times there is no better backup and restore button like an emergency fund. Many people start from zero when they lose their main sources of income. With an emergency fund you can avoid stress and live a healthy life. To add on that, if you have a good investment portfolio, an emergency fund complements it.
