To begin with, an emergency fund as the name suggests is a financial safety net that is normally set aside for emergencies/ unexpected expenses. Think of it as your SOS fund should anything go wrong. Emergency funds should be easily accessible and should cover at least 3 months of your expenses. Key to note, these expenses should be inclusive of your rent, transport, utilities, etc. Having an emergency fund will not only give you the confidence that you can handle any unexpected life events, but also keeps you from spending on impulse as well as making bad financial decisions. Below are some of the tips of setting up an emergency fund;
Given that emergencies can strike at any time and without warning, it is important to place the funds in an investments asset class that offers you easy access to your funds and generates high returns as well. One should weigh the options available to them and make an informed decision that will enable them reach their goal. For instance, you can place the funds in a high yielding savings account, a money market fund account etc. Key to note, this account should be different from your bank account so that you are not tempted to use it.
Emergency funds should not be used for impromptu purchases. Regular spending such as wardrobe upgrades should always be funded using your income and not your emergency fund. Given that there are some bills that can come up and will at that time feel like an emergency, it is important to determine whether it is absolutely necessary to spend the money. As you build your budget, it is key to note and budget for all upcoming expenses such as a Friend’s Birthday present, back to school shopping, etc. so as not to tap into your emergency fund when that time comes.
What is your emergency fund really for then? You can tap into your emergency fund for items such as living expenses after a job loss or after a reduction in your income, emergency home repairs, emergency / necessary medical expenses etc. Key to note, if the circumstance necessitates you to tap into your emergency fund, you should therefore adjust your spending habits to allow for maximum utilization of the funds.
After utilizing your emergency fund, replenishing it afterwards is key to ensuring that you have funds for the next time you are in need. You can never be sure what life will throw your way but being financially prepared through an emergency fund is one way to cushion yourself against such uncertainties.
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