When times get rough, it’s not “who” you’re going to call but “what”. An emergency fund helps you face life’s unexpected twists and turns without turning your pockets inside out.
Setting up an emergency fund is an important aspect of your financial plan with an end goal of
improving your finances and life. The future is uncertain but you can always prepare for tough times ahead.
Have questions? Feel free to consult our experts.
Emergency Fund FAQs
1. What is an emergency fund?
It’s money set aside for things not covered by your regular savings, insurance plans and retirement plans. As you’ll find out below, it’s like saving for the rainy days but in a more structured way.
Call it a fall-back or a go-to-money for emergencies, it exists to help you tide things over in the near short term.
2. Why do I need an emergency fund?
“I’m young and working. What do I need an emergency fund for?” But what if you’ll lose your job today? Your income will stop but your bills —
credit cards, utilities, rent/mortgage payment, and even
car repair — sadly won’t.
This is where your emergency funds come in. This emergency funding will pay those bills so you won’t incur late fees and other living expenses while between jobs.
3. How much should I save up for?
That’s a tough question. Some financial experts say your emergency fund should equal
3 to 12 months of living expenses, others say two months of your net income would suffice. Still, other financial gurus recommend a month’s worth of income, provided that you bump it up as you save along.
In determining the amount you’ll need for your emergency fund, look into these factors:
- Is your income fixed or does it
- Is your job secure or volatile, e.g. dependent on market demand?
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A three-to-12-month plan is ideal but is it realistic to you? Can you still live comfortably with what’s left of your income net of savings? Think about it.
4. Where do I put this money in?
Your gameplan is to store this cash somewhere safe and accessible. Opening a deposit account with a bank or a credit union is a great option.
But if you want to earn a bit of interest, opt for a money market account or one that yields a higher rate for deposits.
5. How do I set up an emergency fund?
Depending on your target amount and date, you can draw up a workable scheme that lets you save a certain amount on a daily or weekly basis. Experts recommend automatically debiting funds into your emergency funds.
To save more money, you can reduce unnecessary expenses like instead of eating out, you can eat dinner at home and
pack your own lunch. Giving up on something you like, e.g. shopping, desserts, clothes and so on until you reach your target amount is difficult but it works.
Setting up an emergency fund requires a lot of willpower; it’s not easy to save money when you don’t feel the urgency to do so. But it always pays to think ahead, you’d be really glad to have something stashed for the rainy days.
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