An emergency fund is a cash saving or reserve that has been deposited aside for unexpected occurrences in the future. You may not have to use the fund, but it will be so handful in the time of need like car repairs, home repairs or extensions, hospital bills, and unemployment.
Why do we need an emergency fund?
So many people have fallen apart just because they did not have any backup like emergency funds. That causes them to borrow from friends or lending organizations. You must know that will add up interests which is a burden for people. Borrowing on interests is never good for your financial future. So an emergency fund can come to you like a shade when you need it in time.
What is the amount you should save?
Emergency funds should be saved for a minimum of 6 months, but the ideal amount of 12 months or a year. Some experts say it should be for 18 months. Do not get confused by the months. Here we mean what is the necessary amount that you must need for a month. Now multiply the amount with the 6 or 12 to get your target emergency amount.
Suppose, your monthly income is $2,000. Now sum up your monthly costs and find out the necessity.
- Rent: $500
- Food: $200
- Utilities: $200
- Loan payment: $100
- Investment: $300
- Personal: $100
- Others: $200
Now see your total monthly cost is $1,600. You have cash in hand of $400 still. Though, everyone’s math is not the same as here. Now figure out the necessary amount that you must need for a month. In this case, our must-need amount is $(500+200+200+100) = $1,000. Investment, personal and others are not mandatory. So, the math is now simple. We need $1,000X6 = $6,000 for 6 months or $1,000X12 = $12,000 for 12 months backup.
Building emergency fund
You have done the math and know the target emergency amount that we should pool up. This is not an easy task. If we save the rest $400 for the emergency fund then it will take a lot of time. But you should keep this in your head always that an emergency fund must come first right after your monthly needs. So, you can skip the investment and other unnecessary costs from your month. Secure your emergency fund first. If you know that you are ready to face any unexpected things in the future then you can jump on the investment area later.
Set a goal
To accomplish anything you must set a goal first. You need to be determined about your goal and plan how to reach it. Setting a goal will keep you motivated.
Consistent contribution
As we cleared you above, you must contribute consistently to building the emergency fund. If you do not contribute then the building fund process will be delayed. Which may put you out of the track. You can automate your transfer system that will be transferred to the fund when the time comes.
Monitor the progress
Nothing will go your way if you do not monitor regular basis. To know your progress toward your goal, you should monitor it on a regular basis. Take necessary steps if you need them.
Keep the emergency fund in liquid form
We already clear you above why you should build an emergency fund. When the time comes the amount will be required immediately. So, the fund must be in liquid form or can be converted into cash easily when it needs. Do not invest the fund in FD or real estate. We suggest you put the fund in the form below:
- Cash: 10%
- Bank: 30%
- Mutual fund: 60%
Try to find the best savings account option and a mutual fund that will offer you the best. So it will adjust at least with the inflation rate over time.
Celebrate your success
Do not forget to celebrate your accomplishment. Treat yourself well after the success. Enrich your mind and be brave to take the next steps. Set another goal to build your future stronger. Investing into other sectors after securing the emergency fund is the right thing.
Do not touch the fund without emergency
Remember, this fund has been raised only for emergency situations. So, you should not touch or spend the fund whenever you want. Keep the fund aside and forget about it. Never think about the fund to spend for your daily spending or entertainment. You will only withdraw the fund and spend it for your emergencies.
Benefits of the emergency fund
Because of the reserve fund, you will have many benefits in many ways. Like
- Less stress
- Well-structured financial decisions
- No more holding back
- Secured future
Conclusions
In the end, we can conclude now that having an emergency fund is not a burden or meaningless cost. It is a blessing for all the people. If the fund is invested wisely, then the benefits from it will be very useful. So, do not waste time anymore. It does not matter what is your age or your position. Start saving the emergency amount for you and your family right now.
