All You Need To Know About An Emergency Fund
Just as the name suggests, an ’emergency fund’ is a fund, which can be used in times when you have no other funds to fall back on. It is used to fulfill a shortfall when something unpredictable comes up in the future. Since it is a reliable fund it needs to hold various guaranteed investments.
What are the types of emergency funds?
Listed below are two types of emergency funds that you can categorize your savings in.
- Short-term emergency fund
It is the fund you need to use up whenever there is an emergency, which is immediate. Keeping a short-term emergency fund is advisable in an accessible account and you cannot expect a lot of returns from this.
A long-term emergency fund provides you with the costs, which help you save up for emergencies that are detrimental in nature. Right from a natural disaster to a job loss, you can use a long-term emergency fund for any big mishap where you will need a lot of funds.
Why should you have an emergency fund?
The biggest reason to have an emergency fund is actually to have some peace of mind so that you are not constantly hassled by the fear of not having funds when you most need it.
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What categorizes as an “Emergency”?
To understand where you should use your emergency fund for, just make sure that you differentiate between wants and needs. If your television breaks down, then you do not really need to use an emergency fund to buy a new TV.
Your emergency fund should be used to combat situations without which you will end up being affected in the long term. Some examples of emergencies are:
- A health emergency
- A family emergency
- Unexpected car repairs due to an accident
- Tragedy striking the house
- Natural calamity
- Break down of an important alliance
How much should one invest in an emergency fund?
A safe way to approach this is by saving up three or six months of expenses in your long-term account and about 10% of your pay for the short-term emergency fund. We know it is difficult to have so much money in one go, but it makes sense to invest so much so that you do not have to suffer later.
What constitutes an emergency fund?
An emergency fund needs to meet certain criteria such as:
- Low/No Risk
- Liquidity
- Accessibility
With all of these points in mind, you can easily build up an emergency fund, which will help you be prepared for all sorts of situations that may come up in the near future.
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