Emergency Fund
What is Emergency Fund?
An emergency fund is money that you keep side for your bad times. If you lose your job or your income stops but your expenses would not stop. The emergency fund comes in handy at that time.
The Covid-19 pandemic has shown us the importance of emergency fund or saving. If you are less then 30 you need to ensure 6 months living expenses emergency fund and if you are more than 30 you need to ensure 12 months emergency fund.
Best Places To Keep Your Emergency Fund
You should always have 10% of the emergency fund available in cash.
You should have 20% of your emergency fund in bank. So that even if it is earning 2-3% Returns, you can withdraw it anytime by using debit card.
And 70% of your emergency fund should be in a fix deposit. By breaking it, take care not to incur a penalty you can access that money by breaking it anytime.
How and Why are Emergency Funds Important?
Emergency fund is a fund in which we invest for short term to protect our family in bad situation. Suppose you have lose your job or there is a pandemic situation in the country, you can easily survive for 6 to 12 months without any problem.
Suppose someone has not Health Insurance or there is such a disease in family member due to which the health insurance money is not enough . In this situation you can use your emergency fund to protect your family members and you will not need to sell your long term investment.
Benefit of emergency fund:
1.You can live without worry thinking about bad times.
2 . If you have an emergency fund then your long term investment or long term plans will not impact.
3. If you have emergency fund you will feel more confident. You will not panic when any trouble comes.
How To Build An Emergency Fund?
To create an emergency fund, you must first calculate your monthly expenses. Suppose your month's salary is $1000 and your monthly necessary expenses is $500 and you want to create 6 months emergency fund. So, $500x6 = $3000 will be your emergency fund.
Now, because your salary is $1000 and necessary expenses is $500 per month. So, You will have to save 30% per month to start Creating your emergency fund. Avoid unnecessary expenses until you successfully create your emergency fund. According to above example your emergency fund will be created within 10 months if you save 30% per month. $300x10 = $3000.
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