It is essential to have savings, even if you are unable to save a lot of money every month. Saving what you can, when you can, adds up over time. Ideally, you want to be prepared for the worst-case scenario. What happens if you lose your job, or your finances take a huge plummet due to unforeseen medical costs? You don’t want to be stuck in a position of financial dependence, or have the debt collector come knocking on your door. That’s why you need to keep an emergency fund.
An emergency fund is a safety net in the form of cash, or liquid assets such as marketable securities, or short-term bonds that can easily be converted to cash.
You may think that your career is stable, and you have enough savings or cash to manage if things get tough, but life is unpredictable.
You need an emergency fund to prepare for unforeseen situations such as:
The more money you have set aside for emergencies, the better. Of course, it isn’t always possible to save the same amount every month.
You can calculate how much you personally need to sustain yourself, and your dependents by looking at certain factors such as your income, how long it will take you to rectify the situation/ stabilize your finances, and if you have other savings that you can use.
It is recommended that you keep enough money in your emergency fund to sustain you, and/or your family for at least three months. Ideally, six months.
Look at the following factors:
Ideally, you don’t want to deplete other savings if an emergency strikes. You need to keep a separate emergency fund which can sustain you, and your dependents for an adequate amount of time if you are faced with unemployment.
If you need to pay medical/ or other large expenses that your insurance doesn’t cover, you need an emergency fund with enough money to cover that expense. Preferably, your emergency fund should contain more than just enough to cover the expense, so that you have enough should another expense suddenly appear.
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