Emergency Fund Examples and How Much Emergency Fund Should I Save?
Updated: Aug 18, 2020
Many things in life are beyond our control. Appliances break down; cars break down, people can have accidents, get divorced, get sick, or lose their jobs. The unforeseen expenses that may arise are infinite and also appear at the least expected moments.
For example, the world is going through one of the most turbulent times in human history as a result of the Covid-19 pandemic. The contingency caused by this virus has brought severe economic damages; many people suffered layoffs or saw their wages reduced. This crisis will significantly affect different sectors of the population even after it ends. That is why it is crucial to have a emergency fund that allows us to get out of this situation without problems.
Otherwise, when these occur, they cause a financial mismatch, and many people are then forced to take loans that make their economic situation even worse. And the best way to do this is to set a budget for contingencies.
Emergency Fund Examples (Reasons for having an emergency fund)
A emergency fund is an amount of money that is reserved for savings (bank and related accounts) or in everyday savings (closet, old suit). You should have easy access, but it is only used in case of emergencies or unforeseen expenses. In addition to financial solvency, the following are the reasons why you need to have a emergency fund.
1. Loss of employment.
No matter how stable you are in your job, some surprises may happen, and you may need to sustain yourself with the savings you have in your emergency fund.
Imagine getting to work on a good Monday morning, and your boss tells you that he no longer needs your services.
What would be your reaction?
A emergency fund is not going to give you another job, but it is going to help you cover your basic needs before you get another job.
For people who are financially prepared with an emergency fund, it is much easier to inhale deeply, exhale, and think about the next step.
2. Unforeseen in vehicle and housing breakdowns
Our car can break down at any time, and repair can be expensive. In more extreme cases, we may have to replace it entirely.
Likewise, in the home, we can suffer both a small breakdown (boiler, heater, burner, and plumbing breakdowns) up to significant catastrophes that insurance does not cover.
The emergency fund will prevent us from using credit to pay for such disruptions or disasters.
3. It protects people from making bad decisions
It protects you from taking bad decisions such as requesting a loan with rates that are not regulated by a governing body, as is the case of firms that grant loans with their own resources at high rates.
Therefore, people go into debt beyond their means because they do not have a financial cushion that allows them to face contingencies.
Emergency Fund Planning
The budgeting of the emergency fund is on top of regular spending. It helps to establish income and expenses for planning that makes better money decisions. A budget keeps you from spending recklessly.
We offer the following tips for people who do not have a budget prepared for economic contingency:
1. Identify your income
Make a detailed review of monthly income, such as salary, fees, or other income that has been accumulated so far, as soon as possible. You must include the money from the savings or investment funds if you have them.
2. Review your expenses
Identify the essential expenses that correspond to personal or family needs such as food, payment of crucial services, rent, debt payments, savings, and separate them from other non-urgent expenses such as some online purchases, clothing expenses and all disbursements that you can postpone until you are able to meet up with the unforeseen circumstance.
3. Reorganize priorities and cut expenses in a crisis
A contingency like the current coronavirus pandemic requires rearranging priorities: it may no longer be necessary to contemplate the costs for transportation, restaurants or entertainment outside; but the payment of sanitizers, some medicines, food through apps and internet payment at home will be a priority the next 3 to 6 months, so it is an excellent exercise to rearrange the expenses that will be vital and cut those that they are not strictly necessary to subsist.
IMPORTANT: If you have a habit of saving or emergency funds, you must keep it current and use it only in extreme cases (unemployment, serious illness, hospitalization). If you do not have a previous saving, it is critical to allocate a part of the income for it, as well as review credit plans and personal loans.
How Much Emergency Fund Should I Save?
There are tons of information and advice about how much of emergency fund needed in internet. Some experts you find in many online blog claiming only few thousand is enough, but some said one year of your income is adequate.
So, what’s the advice?
Certified financial planner would advise you that three to six months of expenses should be saved as emergency fund. If you are 1-income family, you are better to save six months of your fixed expenses for emergency and if you are 2-income family, the amount saved is three months of your fixed expenses.
Here, what we mean fixed expenses are those you have to pay, for example, house rent (or mortgage repayment), utilities, car, children school fee, food and other living expenditure cannot be avoided.
Someone would question gym club membership should be counted or not, I would like to say it’s not needed for my living so I don’t count it. But if you think it’s part of your life, you need to include it in your emergency fund too.
Should I invest my emergency fund?
Now that you have set aside some emergency fund, you are better off than most people who cannot produce a few hundred dollars when the contingency arises. The next question you should have in mind now is what to do with the emergency fund. Will you invest or save it?
What you do with your emergency fund is subject to two factors, liquidity and marketability. If you decide to invest all your emergency fund or part of it, you are not only preserving the purchasing power of the fund; it could also increase over time.
However, the ease with which your investment may be bought or sold (i.e. marketability) when you really need the money is a great concern.
If you take the initiative to save the fund in a traditional bank for the ease with which they can be converted into cash with little risk of loss of principal, it’s highly liquid.
The general principle by financial planner is to advise the emergency fund is only put into an interest-bearing saving account in local bank or credit union which can be easily accessed without any penalties and taxes.
But, the interest paid in a savings is almost insignificant. This is the main reason why some people invest their emergency funds. However, you need to understand that investing limits immediate access to your money.
If you want to invest your fund, find a balance. Take advantage of contingencies investment opportunities while maintaining a savings account that can meet your immediate needs if contingencies arise.
For example, you saved 6 months of your expenses as emergency fund and divide them into two halves. One of them is put into an interest-bearing saving account and another half is invested in liquid and marketable items, such as short term government bonds, that you can sell them immediately once needed.
The first step toward financial stability is to live within a budget. Your income needs to cover your expenses with the remaining part as savings. However, even the best-planned budget may fail when contingency arises.
This is why you need to budget for contingencies.
The unforeseen financial circumstance will not cause as much damage as they should if you have a well-planned contingency budget in place.
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