Emergency financial situations can happen to anybody and any financial arrangement exercise is not ideal without planning for such occasions. The whole idea of having an emergency fund is to offer a cushion against any unexpected expense.
This will ensure it does not have any negative impact on your financial condition and does not rip off the whole financial security.
There are many circumstances which can cause a financial emergency such as a sudden illness, accident, medical emergencies, emergency house repairs, loss of a job, emergency car repairs and much more.
The major reason for having an emergency fund is very clear because when a person falls into an emergency financial situation, they will have to break their savings or make a compromise to get the needed money.
It’s not rare to find people who just take out their credit card and swipe it for hard cash. Opposing popular opinions, credit cards are the worst way to fund any financial emergency. The fastest way to get thousands of dollars its to get a car title loan it is not a long-term solution but a short-term solution.
In a circumstance where you’ve taken a cash advance with your credit card to get the needed money, the credit card company will charge you a cash advance fee with an interest rate. This is a very expensive way to borrow and manage finances for emergency situations.
Therefore, what is the best amount that should be set aside as emergency money? There are diverse opinions on it. Some professional’s experts agree that a minimum of 3-6 months’ worth of monthly income should be set aside for an emergency situation. This amount can differ according to marital status, the size of family and lifestyle.
Everyone must reserve some extra cash in case of emergencies. But, the amount to reserve depends on your income and monthly expenses. The amount that is needed for your emergency fund is open to debate, the minimum amount should be sufficient to cover your expenses for daily living for at least 3 months. It’s also ideal to save for 6 months even though some financial advisers agree on a full year’s worth of cash.
These funds must be kept aside in an instrument, which is easily available when needed. It could be money in a bank account, hard cash, liquid funds or fixed deposits. This will ensure the fund is always accessible instantly or within a short period when it’s needed.
Where to Keep the Cash
Your situations and what can offer you peace of mind are the factors that can help you determine how cautious you want to be. Keep your emergency fund somewhere that is safe and accessible because you may be required to get the cash in a hurry when an emergency arises. The best option you have is to open a money market account or savings account. But, always examine their offer with regards to the interest rate, minimum balance, and other terms.
When you think you’ve saved enough, you can stop. You can now sleep easier and try to start placing your extra savings into higher-interest and less accessible accounts or investments.