I believe most people have heard about the emergency fund in personal finance. We are going to discuss about it in this article.
What is emergency fund?
Emergency fund is cash reserve that you use to pay for unexpected expenses or financial emergencies. It serves as a financial cushion, providing a buffer against job loss, medical emergencies, home repairs, or any unforeseen circumstances that may disrupt one’s regular income or financial stability.
This fund is kept in easily accessible account(s), so that you could withdraw it without any fuss when required.
Benefits of emergency fund
1. Financial resilience
An emergency fund acts as a safety net, shielding you from resorting to high-interest debt or liquidating long-term investments to cover unexpected expenses.
2. Peace of mind
Knowing there is a financial cushion in place alleviates stress during uncertain times, allowing you to focus on solutions rather than worrying about financial survival.
3. Avoiding debt accumulation
With an emergency fund, you can avoid falling into a cycle of debt when faced with unexpected expenses, thereby maintaining financial independence.
How much is enough?
The question now is how much is enough? Do you have to dedicate all your extra cash as emergency fund?
The normal benchmark is three to six times of monthly expenses. We are talking about expenses, not monthly income. So if you do not know your monthly expenses yet, it is a good time to keep track of your spending. You may record your expenditure for three months and take the average as your monthly expenses.
If your income is unstable, perhaps you can keep up to 12 months of expenses. There is no point keeping more than this amount as emergency fund. The extra can be diverted to other avenues, especially investment.
Building an emergency fund
If you do not have an emergency fund yet, you can use the following steps to build your own fund.
1. Set the amount
Determine the amount needed for your emergency fund based on monthly expenses.
2. Save consistently
Allocate a portion of income specifically for the emergency fund. Even small, regular contributions can accumulate over time. You may set up automatic transfers to the emergency fund account to ensure consistent contributions.
3. Review and adjust
Regularly review your goal and adjust your contributions when your salary increases. After attaining the required amount, review your expenses once in a while and make adjustment to your emergency fund if required.
Conclusion
In the realm of personal finance, establishing an emergency fund stands as a fundamental pillar for financial security and peace of mind. Life often presents unexpected challenges, and having a safety net in the form of an emergency fund can mitigate financial stress during unforeseen circumstances. Its presence not only shields you from financial crises but also fosters a sense of financial security and stability. By diligently building and maintaining an emergency fund, you can navigate unexpected financial challenges with greater resilience and confidence.
How can a financial planner help you?
I will help you to calculate the amount needed as your emergency fund. I will work with you to determine your monthly expenditure and recommend the amount of money to keep aside.
I will also provide you with a plan to accumulate the fund. However, you are the ultimate decision maker. Even if the plan is perfect, it would not work if you do not implement it. So you should communicate with me clearly and select a plan that you would implement wholeheartedly.
If you really cannot follow the plan, do not worry and let me know as soon as possible. I will come up with alternatives. Nonetheless, if you always fail to adhere to the plan, perhaps the plan needs to be overhauled. I will help you with this.
Once you have established your emergency fund, then it is time to move to other area of personal finance, especially investment. I will help you in this journey.
If you are interested in working with me to improve your finances, just leave your details here. I will reach out to you and see if we would be a good fit for each other.
Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.
