Have you ever been in, or witnessed a situation where money was needed for an emergency? Perhaps, it was to pay a hospital bill, to fill a badly needed prescription, or pay for some other emergency expense.
You would find that in most cases, people have to resort to throwing themselves on the favour of others, and depending on them for a way out; yet this need not be the case if they have an emergency fund set up. So, let’s find out more about this all-important fund as presented by fool.com.
What is an Emergency Fund?
This is self-funded cash that has been set aside for emergencies like an illness, the loss of a job, or a big, unexpected expense. You don’t touch it until you need it. And this leads us to the next question, how much should this fund be?
How Much Should One Set Apart For an Emergency Fund?
Most financial experts advise that you contribute enough to cover 3 to 6 months’ worth of basic living expenses — essentials like rent, medication, food, utilities (electricity, waste disposal, water), and other important payments. Though this rule isn’t going to apply to every situation and every household, it is a good start in determining how small your emergency fund should be.
Where Should I Put My Emergency Fund?
This fund isn’t actually designed to earn you big returns, so it is advisable not to keep any emergency money in stocks since it is very unpredictable and you need to have the money available when you need it. But does not mean you shouldn’t try to increase it? The answer is No, only that you go about this safely.
If you think a savings account will be just fine, you should know now that savings accounts pay little to no interest! There are other options though — like money market funds (which will pay you more than a savings account) and short-term Certificates of Deposits (CDS) and bonds. Not only are they low-risk, they also come with early withdrawal restrictions which will keep you from withdrawing money before you need it.
Thus, the most important thing is not having a specific figure for your emergency fund, but saving and adjusting accordingly as your situation changes. Why not share this tidbit of information with your parents, guardian or older siblings; they will thank you for it!
See Also: Thinking Of Opening a Savings Account? Get All the Details Here About How It Works
