You can’t expect for your financial life to keep going straight up all the time. What I mean is that there will come a time when it will go south. It’s not a question of whether or not it will happen, it’s a question of when. The real question is how bad will it affect your financial health and how prepared are you going to be? That’s when emergency funds come to the rescue. Most people know how important an emergency fund is but sadly those same people don’t have it or if they do have some money but aside, it’s usually not a true emergency fund.
What is an Emergency fund?
It’s a separate cash account that will help with your monthly fixed expenses for 6 months in case things at your job go downhill. In other words, when someone from HR comes out of nowhere in the morning and hands you a box to pack your things…you know the rest.
Why have Emergency funds?
– Help you keep up with your monthly expenses
– Keep you from using credit cards to avoid being in debt while unemployed
– Gives you peace of mind that no matter what happens tomorrow you and your loved ones will be in good shape
When to use and NOT use the Emergency funds?
You can access the Emergency funds only and only in case you get fired.
You can NOT use the Emergency Funds for car maintenance, medical bills, etc. you should have separate accounts for those types of things.
How much to keep in the emergency fund?
As we said before this fund is for the fixed monthly expenses such as rent, car payments, electricity, groceries, student loans, etc… It’s not for cable subscription, dinning out, condoms or other fun things.
So sit down with a pen and paper and write down your monthly expenses that are very important to you and then make sure to fund your account with 6 to 9 months’ worth of the amount you came up with. For example if your fixed monthly expenses are $2000 then your emergency fund should have an average of $12K-$18K
Where to keep the cash?
I really don’t care where you keep the cash as long as it’s in a separate account from your regular savings and checking account. It could be in a separate bank account, stuff it in you pillow, in the pantry, it doesn’t really matter as long as it’s far away from you but close enough that you can still easily get your hands on it when you need it.
A hidden spot where I keep my emergency fund is in “Money Market Funds”. It’s a very low risk investment product that gives an annual 1-2% return just to keep up with inflation but yet I can access the cash at any time.