Last Updated on June 12, 2022 by Rat Race Running
What if you suddenly lose your job?
How long do you think you’ll survive without asking for help from your family and friends or before taking a loan?
Some may say a month or two. But for many employees, it’s a week or worse since they are already knee-deep in outstanding debt.
The culture of living paycheck-to-paycheck is widespread among the working class because handling money was never taught in school and was almost taboo to discuss at home.
Life is very unpredictable. Many things can and will happen, mostly without warning, which may put you in a financial disaster.
This is where the Emergency Fund comes in.
What is an Emergency Fund?
An emergency fund is a saving, usually worth three to six times your monthly expenses or salary, depending on your preference. But there are situations where you’ll need to have more than a year’s worth of emergency funds.
This fund should only be used as a safety net for when an unforeseeable event suddenly happens, hence, the ’emergency’ in its name.
Why Should You Save For an Emergency Fund?
You may lose your job, your house might need immediate repair, or you suddenly get sick.
This will significantly disrupt your budget (if you have one) or, worse, put you in debt.
So basically, the emergency fund serves as your buffer to cover your unexpected expenses.
Who Should Save For An Emergency Fund?
It is everyone’s responsibility to save for an emergency fund, especially if you are the breadwinner.
Can you imagine what will happen to your dependents if you’re suddenly unable to work?
What Should Be Considered An Emergency?
Personally, I classify an emergency as a difficult event to predict. This includes job loss, natural calamities, sickness, and other unfortunate circumstances.
Car repair/maintenance is not an emergency because sooner or later, you know that it will happen. You should already have insurance or savings for it.
The tuition fee is also not an emergency because you know that your children or siblings need to enroll every year.
And most importantly, the new shoes or clothes you see on sale are never an emergency.
Where Should You Keep Your Emergency Fund?
Your Emergency Fund should be highly liquid. Meaning it should easily be accessible when needed. So placing it in a savings account is advisable.
It is also best to have a separate bank account for your payroll account to quickly identify funds.
Personally, I have two separate banks holding my emergency fund. So if one bank is offline, there is another option.
You should also have a stash of cash set aside at home because there are times when going to the bank is a hassle and money is needed immediately.
After completing your emergency fund, it is also good to place a part of it in a low-risk investment like high-interest savings banks, short-term bonds, or money market Funds.
I Have A Credit Card. Can It Serve as my Emergency Fund?
This is a big NO! Thinking that your credit card is free money will only put you in debt. There are times when using a credit card is better than cash, but not in emergency funds.
Having an emergency fund is crucial and fundamental to anyone’s financial stability.
It can save you from undesired debt and problems when unexpected events happen.
If needed, never hesitate to use it. Let it serve its purpose. Afterward, you can always save replenish it.
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