In your daily financial life, you never expect the unexpected emergency situations. Emergency situations – When something unexpected event comes up in the form of job loss, significant medical expenses, home or auto repairs etc. Suddenly there can also be some trip, some eating out, some expenses related to the kids school or something you’ve never dreamed of. You were not mentally and financially prepared yourself for these unexpected events and every time they happen, it’s like a pinch on your shoe! You didn’t think about it and now it’s in your life.
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You must have ever heard something like – “I had planned to buy a car for the last 3 years and I have been saving it regularly with discipline, but in between something urgent and unexpected cropped up as my car servicing had to be done urgently or my brother/ sibling asked me more money this month or my daughter had to see a doctor last week and now suddenly this month budget’s gone for a toss!” Eventually, you would break your FDs, or liquidate your mutual funds investments and stop the SIP for few months until back to normal.
Why does this happen?
Most of the people don’t plan anything. They just go with flow. And some people do any kind of planning;even their planning fails at some point of time because of a very simple and over looked factor in financial life, which is “unexpected expenses”. A lot of people do not believe in it because for them emergency situation is something which will never happen to them. They tend to think a real emergency is really rare.
How much should be set aside?
Most experts agree that you should keep between three to six months worth of your living expenses set aside in your emergency fund. Depending on your specific situation and whether or not you have children, carry substantial debt and types of insurance coverage will determine what amount is best for you.
The reason you want to have three to six months of expenses saved up is that the most common reason for the need of an emergency fund is due to a sudden loss of income. If you or your spouse loses a job you still have bills to pay and it may take a few months to find suitable new employment.
How to create emergency fund?
If you currently don’t have an emergency fund or find it difficult to save money the key is to start small. You have to realize that accumulating one month’s worth of expenses will take some time, let alone three to six months. If you set your immediate goals to be small and manageable you will have a better chance in reaching them.
The best way to get started would probably be through your bank. Open up a new savings account if you currently don’t have one and begin to save with this first. The next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make saving automatic you won’t even have to think about it.
Where to keep your Emergency Fund?
You should start with a savings account because it is simple to use and generally does not cost anything. The convenience factor is what is important when to begin with. As your account grows you intend to find an account that can earn reasonable interest so that your money does work for you. The next best option to look into is recurring deposits.
It is important to keep an emergency fund in a place that will fairly have liquidity so that you can get to the money quickly in the event of an emergency. You should not to have this money tied into stocks or mutual funds because the volatility of the market could cause you to lose money over the short-term.
Top reasons to have an emergency Fund
If, you have done that and have a good practice to maintain an emergency fund, it will protect your family in case of job loss and provide reserve for any health or other family emergencies. It will give you also the ability to pursue attracting investment opportunities as they come along. It will keep you from losing money since you won’t need to sell other investments during down markets and helps you negotiate lower prices on major purchases. Last but not the least, it will reduce stress which will increase health and well being and eliminate numerous marital arguments.
The real reason for having an emergency fund is to make sure that you do not disturb your investments which are already started and automated. The real reason for having it is, so that you have dedicated funds which you will break before reaching out to your other goal oriented investments. Think of it as a layer between your real wealth which you want to grow over long term and money which you want to use in emergency situation. If nothing happens, you can always use up that buffer for your other expenses or goals, it’s like a bonus for you.
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