It is a known fact that one of the main tenets to positive and productive financial planning is to effectively prepare for the future. This means that not only is an emergency fund a component of a solid money and financial plan, it is an absolute necessity – especially in today’s world of unforeseen events and circumstances and economic turmoil.
This type of fund is designed to cover financial shortfalls when unforeseen events, circumstances, and situations occur that require money.
When you find yourself facing issues that are detrimental to you, your health, and your general quality of life, an emergency fund serves as a means of obtaining the money that you need to handle those issues quickly and effectively.
In this guide, you will learn a few strategies that will help in starting and building an emergency fund that will help you navigate through all of the unexpected events and situations that life may throw at you.
An Emergency Fund Consists of Two Parts
When creating an emergency fund, it is imperative to understand that it should consist of two individual parts. The first should be money for short-term emergencies and the second should be money for long-term emergencies.
The short-term emergency fund should be placed in an account that is easily accessible and bears little in terms of interest. It is important to have a debit card and checks with this fund.
Examples of short-term emergencies include car repairs, replacing appliances, and obtaining necessities before, during, and/or after natural disasters.
A long-term emergency fund should be placed in an account that earns higher levels of interest. You may opt for investments that take a few days to go through liquidation.
Examples of long-term emergencies include job loss, property loss, and health issues.
The Size of Your Emergency Fund
In years past, financial experts often stated that an emergency fund should contain enough money to cover all of your expenses for three months; however, that has now changed.
It is recommended that you include enough money in your emergency fund to cover expenses for a period of six months or more.
Take the categories of your household budget and multiply each of them by six. At the very least, include enough money to cover your house payment/rent, your car payment, your utilities, car insurance, and groceries.
If you have health conditions that require medications, you should include enough for your health care and medications, too.
The short-term emergency fund should fall back on previous recommendations. That means, it should include enough money to handle your expenses for three months.
While it is true that the short-term emergency fund should not be used for expenses, it is ideal to include this much in case you have to fall back on it after going through your long-term fund, or, if you have a hefty expense – such as replacing a motor in a vehicle or completely replacing a vehicle.