EMERGENCIES – Stressful, unforeseen events that throw us for a loop. It could be a broken phone, an accident or even job loss.😲 And if we don’t act quickly, they can wreck our everyday life, especially in terms of our finances. That’s why we need a financial seat belt that can protect us from harm. And that seat belt is the emergency fund.
What is an emergency fund?
As the name suggests, it is money set aside to use in case of an emergency. Would have been quite useful when Joey and Chandler got robbed.🤷♀️
An important attribute of this particular fund type is that most of the amount should be liquid funds. Even financial instruments that can be liquidated easily can be used as part of an emergency fund. The whole idea is that you should be able to access it quickly when you need it.
How much should one save for an emergency fund?
The more the better we say. Getting a reaction like Monica’s is good enough👍
The amount to save for an emergency fund depends upon your income, expenses, loans and investments. It is the common consensus that an emergency fund should at least be 4-6 months of your monthly expenses.
How to save for an emergency fund?
A good way to save is through the 50-30-20 method. This is how it works-
50% of your salary for essential expenses
This will include rent, monthly bills and travel expenses, groceries, any EMIs and insurance premiums too. If you find that your essential expenses exceed 50% of your income, you will have to do a bit of cost-cutting. But if that is not possible, then you will have to change the percentage of what you can spend on non-essential purchases and savings.
30% of your salary for non-essential purchases
From going to the movies to your gym membership, expenses that can be eliminated in times of need, come within this parameter. Keep track of your expenses and make sure non-essential purchases don’t exceed 30% percent of your income. If they do, cut down on them fast.
20% of your salary on savings
The rest of your salary should go into investing and saving. If you have not got a headstart on your emergency fund, it would be better to use all of the 20% to reach your emergency fund goal quickly.
Start saving for your emergency fund right away so that you are ready for any surprises, unlike Chandler.😂