An emergency fund is a sum of money set aside to deal with emergencies. Some of the common circumstances when an emergency fund is needed are unemployment, vehicle accident and medical expenses.
An emergency fund can also act as a buffer against market risk so that stocks and property do not need to be sold at inappropriate times to meet emergency cash needs. This avoids situation when stocks are sold cheaply during a down market to meet emergency cash needs.
In order to know how to you need to set aside your emergency fund, first estimate your monthly expenses or your family expenses if you are contributing to your family as well. Next, decide how many months’ worth of expenses the emergency fund should be able to cover. For singles, three to six months’ worth of expenditure should be sufficient. For married couples, the breadwinner should consider setting aside nine to twelve months’ worth of expenses in the emergency fund. Finally, decide on where to store the emergency fund. The emergency fund has to be liquid and accessible, and be exposed to as little risk as possible, such as a bank’s savings account.
Have you set up your emergency fund? If no, what is stopping you? Given current volatile market with more and more companies axing staff, what makes you so sure that your job is an iron rice bowl? How are you going to make ends meet should you lose your job? Please start budgeting now and force yourself to build your emergency fund.
“All cars have built in air bags in case of emergencies. We do not buy an air bag only when an accident is about to happen. This applies to your emergency fund too.”