Getting caught short is no fun
It is a common saying that we should always “expect the unexpected” out of life. The same is true in the field of financing. Financial gurus and experts will always advice of having something to spend for emergencies.
For those who are confused what emergency funds are for, it’s not something that you can spend for a 70 inch HD TV. It isn’t anywhere close to that and it is more of something that deserves a considerable amount of attention and dedication.
The plan should be this
People also call emergency funds as rainy day funds. While you anticipate your budget for ordinary expenses such as groceries, rent, transportation, bills and other sundry items, emergency funds are those that you use for things outside those expenses. Thus, when you get to the stage of life where you encounter an emergency, you will always be prepared.
It is not exactly the same as always having a good amount of cash flow through the bank account. It’s something that you should have aside in a savings account and you don’t touch but can use if a crisis arises. The last thing you’d want to have to do in an emergency is to sign up for a loan or to have to go and find a willing bank whenever you need emergency funds. This is why it is always best to have a cash stash ready to cover emergencies.
Emergency fund amount
When it comes to these kinds of funds, it is a common rule of the thumb to have a least 3 months’ worth of funds ready for emergencies. For those having a family, it is best to have at least 6 months’ worth of savings. Say you earn as much as $100,000 per year, and you are dealing with monthly expenses that is close to $5,500, then you need to set aside at least $33,000 per year. For those with two breadwinners or both the parents have a stable job, it would be ideal to have 3 months’ worth of pay as preparation for emergencies.
Where to use emergency funds
Among those reasons why you need emergency funds are the following:
• Emergency car repairs
• Medical bills
• Job loss or change
• Property repairs
The bad news is that not everyone are able to keep that much amount of cash aside. In case you’re among those persons, you can at least set aside an amount that you can use for emergencies. One example is trying to keep $5000 in an emergency account just to have something ready and waiting for the unexpected. The amount that you set aside isn’t really the highlight of saving for emergencies. It is about having something to use in case of unfortunate events and emergencies.