Emergency financial situations can happen to anyone, and any financial settlement exercise is not ideal without planning for such occasions. The idea of having an emergency fund is to provide a cushion against any unexpected expenses.
This will ensure that it does not have any negative impact on your financial situation and does not affect all financial security.
There are many circumstances that can cause a financial emergency, such as sudden illness, accident, medical emergencies, emergency home repairs, loss of a job, emergency car repairs, and much more.
The main reason for having an emergency fund is very clear because when a person falls into an emergency financial situation, they will have to break their savings or make a commitment to obtain the necessary money.
It is not uncommon to find people who simply pull out their credit card and swipe it for cash. Contrary to popular opinions, credit cards are the worst way to finance any financial emergency. The fastest way to get thousands of dollars is to get a car title loan; It is not a long-term solution but a short-term one.
In a circumstance where you have taken a cash advance with your credit card to obtain the necessary money, the credit card company will charge you a cash advance fee with an interest rate. This is a very expensive way to borrow and manage finances for emergencies.
So what is the best amount to set aside as emergency money? There are various opinions on this. Some professional experts agree that a minimum monthly income of 3-6 months should be set aside for an emergency situation. This amount can vary based on marital status, family size, and lifestyle.
Everyone should set aside some extra money for emergencies. But, the amount to reserve depends on your income and monthly expenses. The amount that is needed for your emergency fund is open to debate, the minimum amount should be enough to cover your daily living expenses for at least 3 months. It’s also great for saving for 6 months even though some financial advisers agree to a full year in cash.
These funds should be kept aside in an instrument, which is readily available when needed. It can be money in a bank account, cash, liquid funds, or fixed deposits. This will ensure that the fund is always accessible instantly or in a short period when needed.
Where to keep the cash
Your situations and what it can offer you peace of mind are factors that can help you determine how cautious you want to be. Keep your emergency fund in a safe and accessible place because you may need to get cash quickly when an emergency arises. The best option you have is to open a money market or savings account. But, always examine your offer regarding the interest rate, minimum balance, and other terms.
When you think you’ve saved enough, you can stop. Now you can sleep easier and try to start putting your extra savings into higher-interest, less accessible accounts or investments.