Tuesday, March 28, 2017

Emergency Fund and Why It Is Necessary



Keep saving, for who knows when the thick, sturdy and long trunk may be filled. Sometimes, the bright shining sun on a beautiful spring day may hide behind the scary black clouds to pour out thunder. 

Life is never as we see it, even Steve Jobs had to face a stressful public failure, although he was a millionaire by then, but money is never constant, it keeps flowing away like a gushing river. 

Saving up for an emergency is the best way to cope up in times when an excess amount of money is immediately needed.

An emergency fund stored up beforehand can prevent people from untimely issues like that of health, failure or even poverty; saving money may seem difficult in the beginning, cutting luxuries to save up, but the result of hard work and patience is always fruitful. 


Even if the emergency fund isn’t too big in amount, it’ll always help in reducing the amount of money. Some Americans reportedly tell that during the great depression in the 1930s, their saved up emergency funds helped them eat at least once a day for some time. 


Types of emergency funds


● Short termed

This type of emergency fund is usually for smaller emergencies like house repair, car repair, failure of a costly appliance, health emergency and much more. 


These should be in accessible accounts which usually bear little interest. Accessibility is the most important thing- since usage of a debit card or check writing is a must.

● Long term

These are for big scale emergencies like- earthquake, fire, unemployment, immediate purchase of some costly but necessary thing. 





These also need to be accessible but keeping them safe in an account that takes days to liquidate works fine, till the short termed emergency fund is well saved up. These have an increased level of interest.

Always remember an emergency fund should always be quickly accessible and easily liquidate (converted into cash) and should be kept at – no risk. 


Benefits of having emergency fund


● Stress free

Life without a ‘financial safety net’ is a life on ‘financial edge’ hoping to pass by without bumping into an emergency; it intimidates the financial stability and well- being of a person. 


Being well prepared for any kind of financial menace can make a person lead a successful and confident life. Stress is the cause of serious health issues; better keep away from it and start saving up for stability. 

● No unwise whims or fantasies

Have a separate account for the emergency fund; it’s the best way to store up funds. The more out of sight it is the more out of mind it will be, if it’s as close as on the debit card, it won’t be your fault but your four-five digit saved up money will lure you into buying a dress or the latest gadget. By keeping it in a separate account, you’ll know how much you’ve saved up and how much more you need to save.

● Away from bad financial decisions

It will keep you away from bad financial decisions; you’ll always have this thought stored up for the fund to be saved. All decisions will be risk-proofed when a goal of saving up stands ahead. 


Digits of the fund and why so much


According to financial experts, saving up to six to eight months worth of expenses is always the best. It’s painful to cut off luxuries which we treat ourselves with, or pamper our souls with new clothes and food. 


But these funds can help in times of serious trouble. Corporate jobs are always risky and demanding, unemployment can stand up unexpectedly with no warning bells. Taking the unstable economy in hand, a saved up fund of about 3 months expense doesn’t come to even close enough of being an aid during the emergency. 

Time takes a different toll when saving up for retirement; six month’s expense will look too puny. A saved up $14583 for funds will look like a small twig.


Building the emergency fund


The most disheartening aspect of saving up for an emergency fund is the contribution of a large amount of money. Saving $6000 per month seems out of reach for some people. 


But there is no need to pay everything at once; an emergency fund can be built up little by little with time.

Building the fund

First, make a well-schemed list of the expenses per month.




Food
$5233.71
Transportation (no car)
$225.4
Utilities
$201.76
Sports and leisure
$275.44
Child care
$2328.77
Clothing and shoes
$ 504.72
Rent (approx)
$1942.22




If the pocket is short, then some expenses can be shortened or cut. Cutting basic expenses is very difficult, but slowly with time, some improvements can be made. 


If you start saving up for six months, the total amount will cost approx $27000 which may increase with interests. 




Months
Cumulative expenses 
1st  month
$ 4,658.98
2nd month
$ 9,317.96
3rd month
$ 13,976.94
4th month
$ 18,635.92
5th month
$ 23,294.9
6th month
$ 27,953.88



Daily expenses may vary from state and city wise, moreover the monthly income of a person and the people living in the house matter. 


Break it down


First, determine and make a monthly expense chart, then decide the figure of the fund needed as per the money left from the monthly income. 





Determine the time it will take to reach the goal based on monthly savings, breaking it down will help in keeping up with this goal as well as targeting for other things too. 


Wasted money


A family usually wastes its money up to 10% per month. Over usage of electrical appliances, electricity, ordering food etc can be stacked and used wisely. This money, be it little in comparison can be used up for the emergency fund.


Automatic payment


Automatic or direct payment from the checking account to the emergency fund is a good method of payment. Forgetting will not be a problem, and since it will be done by the bank the person will not worry about it for longer and will try to adjust to the changes.


Dividend earnings


Padding the account with dividend earnings is also a good method, dividend accounts are not meant for just investing the income they can also be padded up for the emergency funds.

With pain comes success, a saved up emergency fund will bring pride and assurance.

Peter Christopher is the personal finance blogger at Finance Care Guide and a guest columnist for many blogs that deals with providing practical solutions to different financial issues. Visit him on Google Plus and Twitter.



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