An emergency fund that you keep aside to store funds for using in case of an emergency. This can be a loss of job, a major illness or an unavoidable expenditure.
The main purpose of keeping an emergency fund is to stabilize your financial security and you can use it to pay for emergency expenses and also eliminate your need to go for high interest loans.
Purpose of Emergency Fund
Lots of unexpected incident can turn up in your life and you need to be prepared to face them. The best way to face emergency situations is to have sufficient liquid money ready to use. The last thing you want is to be complied to go depend on loans or credit card which will practically worsen your financial situation. That’s exactly why you need an emergency fund.
The current economic turmoil has caused rounds of layoffs and getting fired from your job won’t be a very surprising incident. In case you want to switch your job and get started withe a new income source, this fund will be your best friend in the mean time.
Medical costs can go sky high. When you have an emergency fund, you can go on without having to choose between your health and your rent. Your car can break down, you might need to fly away to a distant state for attending a relative’s funeral, your home might need a sudden repairing and so on. It’s a necessity that cannot be overemphasized.
How to estimate how much money you need?
This is very important question when it comes to setting up your emergency account. The general answer to this question is that you need to have the living expenses for three to six months at least. This is very generic estimation and might seem like an awfully vague figure to anyone. After all, it could make the difference of thousands of dollars.
The more reasonable answer would be-every single person has a different situation and the emergency fund requirement will vary accordingly. These are some questions you need to ask yourself while determining how much money you should have in an emergency fund.
1. Do you own a house?
If you do, then how old are its structures and appliances? If you’re a homeowner, you should probably move towards the six month emergency fund plan. When you have a lot of assets, unexpected expenditure events are more likely to pop up. So it’s wiser to pile up a few thousand dollars and work on the six month plan.
2. How old is your car?
The older your car gets, the more repairing it will need. Although individual repairs might be cheap, they can sum up to a big amount over time. If your car is very old, it’s more appropriate to save six months of living expenses in your emergency fund.
3. Do you have a stable job?
This is probably the most influential factor which can determine the size of your emergency fund. If you are self-employed, a seasonal contact worker or a freelancer, then you should definitely have six months of living expenses over the safe zone. However, if you have a stable job or working in a high-demand industry with a high probability of securing a new job quickly in case of a sudden layoff, then you’re good to go with three month expense.
4. Are you well insured?
Check if your health insurance is good enough. The top reason for bankruptcy of people in the modern world is because of a major medical crisis outside the coverage of health insurance. If you are facing a medical emergency it’s safer to save six month expenses.
Sometimes, insuring yourself is merely not enough. As those family members who are depending on you as breadwinner are also exposed to health risk. If your whole family is adequately insured, then it’s ok to have a lower emergency fund buffer.
5. How big is your family?
The bigger your family is, the bigger are the chances for unexpected expenses. However, if you’re single person with a steady job, three months living expenses in the bank is good enough for you.
These questions are not all that you should consider while determining your emergency fund. As stated before, the case are different for different people. Evaluate your life, predict your future needs and choose an amount that would make you feel comfortable . it’s good to remember that this emergency fund will be your biggest help when when you fall. So make sure you've got a big net to hold on!
Different ways to calculate emergency fund size
The size of your emergency fund depends on a lot of factors. Based on these factors, there are different ways to calculate your emergency fund size. The most common and popular way is to calculate based on monthly expenditure. Everyone has an estimate of how much money is required to comfortably cover a month’s expenditures. You can have your emergency fund store your living expenses for three, six, nine, or twelve months.
Getting started with an Emergency Fund
You should set up a small initial goal. It is not wise to bite off more than you can chew. The bigger your goal is, the more difficult it will be to reach there and you’ll feel like giving up an emergency fund of RM1,500. This is a goal that can be reached in about few months (or even less if you have a better income state). Despite being a small amount, this can make a huge difference when it comes to an emergency situations.
Now break this amount into smaller pieces. If you can save RM125 in a week , it will add up to RM1,500 in just three months! So it’s highly savings plan. The number should be challenging but not unreachable.
Article source: News Straits Times
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