The Importance of Emergency Fund and How Big It Should Be
Emergency funds are funds that you use during unforeseen incidents. The amount that you need for this emergency fund is hard to pinpoint. There is some rule of thumb stating that you should aim for the three and six months of expenses. Some instances also prompt you to save a high as 12 months of living expenses. It’s quite a lot, as many people would think, but the truth is, you are not required to save it all in one go. You can also use financial software from IRESS if you are not so sure where to start when saving and budgeting. Here are the things that you need to know about emergency funds.
Understanding the Rule of Thumb on the Amount of Emergency Fund
Most financial experts suggest that emergency funds should be equal to your expenses within three to six months. That’s quite huge if you know that the target that you have still depended on some factors. Check them here;
- Your health
- Your debt
- Your living lifestyle
- Your car and rent
- Your dependents or kinds
- The stability of your job
- You must be able to save as much as six months of your expenses if;
- You are living in a high-cost living area.
- You think it will be tough for you to take on another job aside from your current job.
- You have your own home
- You have a job that isn’t very stable
- You have dependents at home
- You have people that invite you to home
- You have a medical condition
- You do not have financial experts
- You do nor a financial support network.
Of course, living a year is very tough; but if you were able to do so, check out below.
- You are earning well.
- You provide for multiple dependents.
- You provide for your retirement
There are already a good number of people who can have two of these categories. But you can save less if you see some unfamiliar risks in your life.
Building the Emergency Fund
There are a couple of steps that you need to build your own emergency fund.
Setting a realistic savings goal – you should be able to determine the amount of money that you want to save. When you set a goal, you consider your risk factor as well as your circumstances.
Calculating your expenses for one month – when you calculate your expenses, add the expenses that you still need to pay even if there’s an emergency. These would be your monthly bills, groceries, and rent.
Automate your savings – currently, there is a lot of financial software, particularly the ones from IRESS, which can help you deal with your savings. There is software nowadays that will automatically deduct from your bank account a certain amount that you already approved.
Take advantage of other trading opportunities – there are instances in which money comes naturally your way, be it in the form of a side hustle or others can help you achieve sooner than what you think.
If you think that your goals are tough to reach. One thing you have to remember is that you don’t need any of it as soon as possible. Better if you can think of it as an ongoing process.