An emergency fund is money that you have set aside to specifically cover any unexpected expenses that may come up. An emergency fund may cover unexpected car repairs, medical bills or other emergency situations. You may also use an emergency fund to help pay your bills when you are unemployed. You should also prepare for unexpected events with a solid plan in addition to your emergency fund.
Initially, you may want to start with a small emergency fund of 1 lakh to 1.5 lakhs. Eventually you should build your emergency fund to cover three to six to twelve months of expenses. If you work in a field where lay-offs are common you should save more rather than less. As you begin to master budgeting, you will create sinking funds for many expenses, and your emergency fund will be there primarily to help you if you were to lose your job or you were unable to work for a period of time. You should save up for a small emergency fund before paying off your debt.
Emergency funds should be held in an account where you can access them fairly quickly. This would include a good money market account or a high interest savings account. You may also consider using a CD Ladder. It is important to realize that you are not going to make money off of your emergency fund. Take the time to select the right account for your emergency fund.
It can take some time to build up your emergency fund. It is important to remember that you are saving up to cover your expenses, and not your income. For example, you will not be putting money into savings when you are laid off from work. You can also cut back on many of your expenses to make your money last longer. You may want to set up a skeletal budget now, which will show you the items you need to cut out immediately if you were to lose your job. This will make doing it easier, and give you one less thing to worry about as you work to bring your income back up.
In addition to a good emergency fund, you should make sure you are carrying adequate insurance for your family. This can cut down on all types of unexpected expenses and give you additional peace of mind. A life insurance policy is essential if you are children. Once you have taken care of these basics, you can begin to build real wealth and live comfortably.
Although it may seem like a sacrifice, setting aside money in an emergency fund can provide you with true peace of mind. It can help you through otherwise stressful situations and make it so you can just focus on taking care of the problem instead of worrying about finances during a crisis. The sooner you start on your emergency fund, the sooner you can take advantage of these benefits.
Your emergency fund is also a way to protect your savings. For example, if you are saving home a home, and you have a medical emergency, you will not need to dip into your down payment savings to cover the costs, instead you will use your emergency fund for that. This can help you to continue to move forward with your financial goals even when you face the unexpected. It is important to establish an emergency fund as soon as possible. It can give you peace of mind through a crisis and make it easier to make good financial decisions.
One of the most popular pieces of financial advice is to build an emergency fund.
It is a fund you only use in case of dire, unplanned events. They’re the types of situations that would otherwise force you to go into credit card debt as a last resort.
What You Should Spend Your Emergency Fund On
While you hope for the best, sometimes unfortunate events happen that you can’t predict. Some examples are:
You and your spouse might both lose your jobs at the same time.
You may have a major medical catastrophe.
Your insurance may refuse to pay a large medical bill.
These types of events are truly unpredictable. It is what an emergency fund is meant to cover.
How You Should Form an Emergency Fund
Financial experts recommend building an emergency fund that covers at least three to six months of living expenses. They anticipate you will need to tap into this fund if you suffer a major job loss. You want the fund to be big enough to cover several months of bills while you look for a new job.
Reserve your emergency fund for these kinds of once-in-a-lifetime catastrophes. In the meantime, incorporate “saving for home repairs” or “saving for car repairs” when you make a budget. Never forget to budget for savings.
What You Should Not Spend Your Emergency Fund On
Many people are caught off-guard by major one-time costs like property tax bills, additional income tax owed, car registration renewal, and holiday gift budgets.
But, these aren’t emergencies. You know you’ll have to pay taxes once a year. You may not know exactly how much money you’ll owe for taxes, but you know you’ll have to pay something. You should budget a little bit of money each month for this bill, but it should exist separately from your emergency fund.
Occasional, Predictable Expenses
Some people use their emergency fund to pay for expenses that are predictable in nature, but not in time.
For example, you know you’ll have to pay for major car repairs at some point. You don’t know when this will happen. Your car may break down this year, or it might not break down for another three years.
But you do know that, at some point, you’ll have to pay to fix your car. It is an expense that’s predictable in nature, but not in timing.
This is also true for needing to replace your car completely. At some point in the future, your car will break down to the point at which it’s no longer worth fixing. Instead of raiding your emergency fund to buy a new car, start making car payments to yourself right away.
The same is true for replacing your washing machine, water heater, air conditioner, dishwasher, and the leaking roof on your house. You don’t know when your roof will spring a leak, and you can’t predict when your refrigerator will break down. But you do know this will happen at some point in the future. The event is predictable. The timing is not.
Ideally, you should not use your emergency fund to pay for predictable and one-time expenses. You should set aside a little bit of money each month allowing you to pay for repairs and maintenance issues when they arise.
Dilzer Consultants Pvt Ltd