What Is An Emergency Fund And Why You Need To Have One

What Is An Emergency Fund?

Emergency fund is simply a fund that you ONLY use in times of emergency, such as when you encounter medical/health problems and you need to spend a large amount of money, when you loss your job, or any other expenses that can be considered major and necessary. It also makes you feel secured when it comes to your finances, emergency fund serves as a safety net for you when unexpected things happen. You won’t also need to use or accumulate debt like using your credit card or getting a loan as a last resort because you already have the money.

Top Reasons Why You Need An Emergency Fund
  • You or your spouse become jobless
  • A member of the family needs medical or surgical procedure
  • To fund a major household repair
  • To lessen some of the money arguments with your spouse
  • You need to buy something big and necessary

How Much Emergency Fund Do You Need?

Now, you maybe asking how much emergency fund do you and your family need? Well, it all depends on your family’s monthly expenses. A rule of the thumb when it comes to building up your emergency fund is to have at least three months to six months of your monthly expenses. Some may say to save at least 9 months or even 12, but it is all up to you. You’re the one who knows how much you and your family need in times of trouble.what is an emergency fund and how much emergency fund do you need

To give you an idea on how much emergency fund you really need, you can base it on your past three months’ expenses. Know how much you spend on food, transportation, utility bills etc., basically all the expenses that consumes your budget. After determining all that, multiply the amount you get to how many months you want your emergency fund to support.

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As said above, it can be three, four, even twelve. When you lost your job, it can be hard to find another one fast, so having 9 to 12 months of emergency fund may be necessary for you and your family.

Where To Put Your Emergency Fund?

Of course, you can’t build your whole emergency fund immediately, not everyone of us are wealthy enough and are able to earn thousands of extra money at once.

It’s best to build it little by little and open your own high-yield savings account or a time deposit account where you can store your saved money. You can even invest your emergency fund on a money market fund to aid you in building it up, it can give better returns than what the banks offer, though, it still has risk when it comes to this, so beware.

It is also advisable to get an account that is liquid and can be easily accessible, so that you can get it as soon as possible when an emergency happens.

I believe that having an emergency fund is a requirement for any family. If you’re not the one making the decisions in your family, you can still make a difference by informing your parents to build up your family’s emergency fund. All of you can help on this through cutting down your expenses, by making sure that you follow a budget plan and by keeping yourself healthy.

Build it as early as soon as possible, because no one knows when a tragedy/accident/emergency/catastrophe may happen. Having no money to spend for that when it happens can really get you in debt and give you a very bad headache. You don’t want that, right?

I hope this article helped you know what, how much and where to put your emergency fund. Do you already have your own emergency fund? What’s the main reason why you decided to have one?

Photo Courtesy of 401(K) 2013

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Mark Holland

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