Building an emergency fund is one of the most important financial goals. Emergencies are unpredictable and may result in a huge strain on your finances. An unexpected illness, emergency home repairs, unfortunate accident, or a sudden job loss may derail your financial stability. You may need finances for other emergencies such as tax liability, vehicle breakdown, family crisis, or funeral expenses of a loved one, among others.
Though emergencies may not be avoided at all times, the best you may do is be financially prepared. You may, therefore, build an emergency fund in order to deal with unexpected events that life throws your way.
Understanding the meaning of an emergency fund
Simply put, an emergency fund is synonymous with a bank account or a separate savings account, which may be used to accumulate a decent corpus. The amount may then be used to meet expenses associated with unforeseen events. It is necessary to understand that this amount should not be used for planned events like college fees or marriage expenses. An emergency fund should solely be used for meeting expenses if a financial crisis were to occur.
Amount to set for emergency fund
It is imperative to determine the amount to be saved for your emergency needs. The size of the fund will depend on numerous factors such as your day-to-day expenses, monthly income, lifestyle expenses, and the number of dependents, among others. Other important aspects to keep in mind include your family’s financial needs, job stability, and debt liabilities, besides others. You may consider such factors and set aside a certain amount every month towards an emergency fund. A recommended option is to save a minimum of six months’ salary to fund your emergency needs.
The best place to invest the money
The best place to invest your emergency saving is in a bank account, such as a saving account. Depositing your emergency funds in such an account offers numerous benefits such as the ability to earn interest. Besides, such an account is easily accessible at any time you are in a cash crunch. Moreover, a savings account provides numerous other benefits and advantages such as cash withdrawal facility, convenience due to an online presence, locker facility, insurance cover, and an option of a debit card, among others.
Emergencies may lead to a financial crisis. It is, therefore, important to realize the importance of building an emergency fund right away. You may strategize your finance and create a budget to set aside an amount every month. By doing so, you may tackle unexpected expenses rather easily without burning a hole in your pocket.