Building an Emergency Fund
This article gives you several advices on how you should set and manage an emergency fund that will be needed for your personal insurance when financial hardship is experienced.
Reasons for an Emergency Fund
Life is full with surprises which may meet you unprepared, which calls for the need of an emergency fund. It will significantly help you if you incur some medical expenses or lose your job, or in case for some reason you cannot withdraw money from your accounts.
Life becomes more difficult when you have not taken the needed actions to provide for hard times. The lack of emergency cash may push you into taking a loan that comes with unbeneficial terms and conditions. The problem will not be healed but rather increased by the debt you have incurred.
On the other hand, if you have an emergency fund you will enjoy flexibility, ability to react, and more alternatives to choose from.
When an emergency event occurs it is time to dip into the fund. However, after you have spent the money, you should recover the fund to its initial level. Otherwise, you will lack the security, which was experienced beforehand. The need to rebuild your fund immediately after it was spent is called by the possibility that another crisis may be experienced in the near future.
You should also try not to spend the emergency cash for purchases that are not urgent. Such purchases should be financed from a separate account.
Emergency Cash Parking Places
Emergency cash should be easily accessible. This means that there shouldn't be any penalties or delays when you need to withdraw your money. Money markets and savings accounts are some of the places that meet this requirement.
Internet bank accounts are another place where you can park your emergency cash. Instant payment is made possible by the checkbooks and debit cards that are provided by some companies. You will be also able to withdraw money within several business days.
In exchange for cash accessibility you will get lower earnings on the money. This is the cost paid for liquidity.
Estimating the Right Amount of Emergency Cash
In order to determine the right amount of emergency cash you should keep, look at the expenses you incur. The money in the fund should be enough to cover the expenses for the next 3 to 9 months. The way you evaluate your current situation and the possibility to experience a negative event may determine the amount of money you will hold.
Your monthly budget lists the incomes and expenses you have. Your emergency fund should include the coverage of the expenses that are of a basic fixed character. For example, you should have enough money to cover for rent, mortgage, transportation, food, insurance premiums and other necessities. The amounts you allocate for savings should not be included in the emergency fund, since it times of financial hardship the last thing you will want to do is to save money. You should keep enough money that will sustain your basic living.
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