Life is not a bed of roses, as the saying goes. You will face so many incidences you do not expect. Many of those events will cost you an unusual amount in bulk. Your emergency funds will save you at those times as the best friend in need. Let’s learn why emergency funds matter and how to maintain the fund.
Table of Contents
Emergency Funds
An emergency fund is an easily accessible fund kept aside for significant unexpected and sudden expenses. It is a backup when you face high and unavoidable costs suddenly. It may be a savings account that is separate from your regular account.
Why emergency funds?
You need emergency funds for serving different aspects of your financial decisions. Here are some of the benefits you derive from emergency funds.
Peace of mind
When you have dedicated funds for uncertainties, you will feel peace of mind. There will be fewer tensions, pressures, and insecure financially. Mental peace matters a lot.
Protection of savings
Provisions for an emergency fund protect your other savings. You are not in any situation to encash other savings for meeting emergencies. For example, you are saving for a car purchase, but a medical emergency may force you to spend that fund prematurely if you do not have an emergency fund.
Smooth financial planning
A dedicated emergency fund helps you plan all other financial areas smoothly. In case of urgency, you do not need to interfere with additional funds. None of your plans is ignored during any uncertain situation.
Timely measures
Money is the second god, if not the first. So, if you do not have funds for uncertainties, you can not take steps timely. When you do not readily access funds, you will first try to manage the funds, then go for measures. With emergency funds, you can take the necessary steps first. Timely decisions and actions save time, assets, and even life in many cases.
Considerations
Emergency funds are for sudden urgency of large funds. It should be neither so available to spend on any purpose nor unreachable when necessary. You are to think of the reasonable growth to fight the inflation too. Some of the considerations include:
Access
Easy and readily accessibility is a significant aspect of creating a fund for the crisis. If you face difficulties in availing the fund, you may not correctly handle the emergency. Therefore, be sure to hold your fund in an easy-to-reach account.
Taxes
While saving for the crisis, consider the tax impact on the fund you accumulate. First, hold assets in such a way that ultimately allows you more tax benefits. Then, analyze the tax impacts on the principal and returns.
Price Fluctuations
Keep your fund in assets or accounts that suffer from more minor price fluctuations. For example, if you invest in the stock market, your emergency fund may result in a meager amount when you need it.
Growth
You are saving for an emergency. You are not closing the door for growth. Try to ensure competitive growth with liquidity and safety. Moderate growth will strengthen your crisis management capacity as more funds will be used.
Inflation
Inflation is also a vital factor you need to focus. Suppose your fund can not ensure growth to compensate for inflation; you lose your money. You will end up with inefficient fund management and a lower return on investment.
Fix the facts
The amount
Keeping a fund covering 6 months is a fair amount as a rule of thumb. Amount fixation for that 6 months is very complex. You need to take into account the following factors:
- Your income
- Costs and bills
- Your lifestyle
- The number of dependents
- Debts specially installments
- Layoff trends in your industry
Debt repayment or EF
Debt payment is always a priority for saving plans. So naturally, it is better to pay off high interest-bearing debts before emergency planning. However, you may save in small quantities while repaying loans. Besides, if the emergency fund pays more returns than the charges of your debt, you may save more and still pay off debts even in small amounts.
Restrain from temptation
Very often, emergency funds are not used for targeted issues. Instead, temptation forces take out the fund as it is sitting idle. So, be specific and rigid about the areas where you will spend the emergency fund. Otherwise, the real tiger will come, but all the funds are out of pocket.
Where to use funds
Here are the situations and purposes your emergency funds will contribute:
Car Repairs
Car overhauling or major repairs in case of accidents may be an unmanageable financial issue. Your dedicated funds for such incidence may be a great way to manage the large amount instantly.
Home Repairs
Repairs of homes for unwanted situations or design change may require a handsome amount immediately. If you have a fund, you will feel comfortable to manage the necessary amount promptly and easily.
Medical Emergencies
Medical bill is one of the most common reasons for going below poverty line. Sudden sickness calls huge financial support that is tough to manage without loss of plans or assets. Your emergency fund may guard against sudden medical emergency expenses.
Job Loss
Job loss is a common situation in many industries. It varies from industry to industry and even region to region. The government job is less prone to loss.
However, private sector jobs may face more uncertainty. You may not get suitable designation if it goes without major notice period. During job switch, you may not require extra funds. But if you face sack or sudden disposition, emergency fund will be your savior.
Unexpected Travel
Travels are not always preplanned and enjoying. Sometimes, you are to travel for emergency and suddenly. You may not have enough fund to cover the travel expenses. For example, if you need to see a sick near ones or join the funeral in distant location, emergency fund will make the funding side easier. Very often, emergency travels are very costly as you are to use fast transport to reach quickly.
Moving Expenses
Change is the inevitable part of life. There come many changes that require your movements from one location to another. It includes a handsome expense. In some professions, like army and marketing, movement is more frequent. Moving your family is very expensive and emergency funds will bear the burden.
Family Emergency
Family is the most priority factor in our life. Often, we are more passionate to the family than ourselves. So, keeping a fund to support the family emergency is the key for family care. You are always in a good mood when you have kept aside a fund to help your near and dear ones.
Family Emergency may arise from the below situations:
- Dealing with a loss
- Taking care of a child or other family member
- Emergency pet care
- Funeral costs
- Losses due to criminal activity
Start an Emergency Fund
A well beginning is half-done. So, start saving for the fund, stick to the plan and withdraw only for the desired situations.
Starting the emergency fund may include:
- Set your fund goals
- Track your income and expenses
- Fix the fund size
- Develop a plan for growing the fund
- Put the fund in accessible account/place
- Stick to your savings plan
- Never withdraw for other purposes
FAQs
Is a holiday savings account the same as an emergency fund?
No, a holiday savings account is not the same as an emergency fund. A holiday savings account is for funding a preplanned and expected occasion but an emergency fund is for covering an emergency and unexpected incidence.
What’s the 50 30 20 budget rule?
The 50 30 20 budget rule is a method of budgeting that helps you spend less money. It’s a way to keep track of your spending so that you can make sure you’re not overspending. Besides, it makes sure that your income is enough to cover all of your expenses.
- 50% of your income should go towards necessities.
- 30% of your income should go towards wants.
- 20% of your income should go towards savings and debt repayment.
How much emergency fund is enough?
- You should have at least 3 months of living expenses in the fund.
- You should have enough money to cover your basic needs for at least 6 months.
- It depends on how much you spend each month.
- The amount of emergency fund you need depends on your financial situation.
- It’s important to have enough money in case something unexpected happens.
Do I need a 12-month emergency fund? Is 1 year emergency fund too much?
To be in a financially safe and sound situation, you may keep a 12-month emergency fund.
Can my emergency fund be in stocks?
The financial advisors and professionals discourage keeping emergency fund in stocks because of the volatility. You may need to sell off the stocks at a very low price incurring losses when emergency arises.
Should emergency funds be in cash?
Emergency funds may be in cash but preferably in a savings account that is withdrawable readily without any extra charge. Such savings account is better to be different from your regular checking account.
Do rich people have emergency fund?
The rich people hardly have emergency funds in cash. They keep versatile sources ready to fund the unexpected situations. They hardly hold any cash in unproductive areas or saving accounts. However, there are so many rich people who manage emergency funds.
Wrap up
When an emergency strikes, it’s essential to have enough money ready to cover your expenses. So what should you put aside? And how much do you need? The answer is simple: save some % of your income. You can fix how much you like to reserve. You can set up a regular saving schedule and allocate the same amount weekly or monthly. You may save for the occasions and holidays.