Anyone can face a financial emergency, and no financial planning exercise is complete without a contingency plan in place. The purpose of having an emergency fund is to provide a safety net in case of an unforeseen expense.
This will ensure that it has no negative influence on your financial situation and that your financial stability is not jeopardized.
A sudden sickness, accident, medical emergencies, emergency house repairs, job loss, emergency car repairs, and other conditions can all result in a financial emergency.
The main reason for having an emergency fund is that if a person gets into a financial emergency, they will have to break their savings or make a compromise in order to receive the money they need.
It's fairly uncommon to see someone simply pull out their credit card and swipe it for cash. Credit cards, contrary to popular belief, are the worst option to fund any financial emergency. A car title loan is the quickest way to get thousands of dollars. It is a short-term solution rather than a long-term answer.
If you obtain a cash advance on your credit card to get the money you need, the credit card company will charge you a cash advance fee as well as an interest rate. This is a very expensive approach to borrowing money and handling finances in an emergency.
As a result, what is the optimal amount to set aside as emergency funds? There are a variety of viewpoints on the subject. A minimum of 3-6 months' worth of monthly income should be laid up for an emergency, according to several professionals. This amount varies depending on marital status, family size, and lifestyle.
Everyone should keep some cash on hand in case of an emergency. However, the amount to set aside is determined by your monthly income and spending. Although the exact amount required for your emergency fund is debatable, the bare minimum should be sufficient to cover your daily living expenditures for at least three months. Even while some financial gurus recommend saving for a full year, it's also a good idea to save for six months.
These monies must be set aside in a liquid asset that may be accessed quickly when needed. Money in a bank account, hard cash, liquid funds, or fixed deposits are all possibilities. This will ensure that the capital is always there when it is needed, either immediately or within a short period of time.
Where Should You Keep Your Money?
The factors that might help you select how cautious you want to be are your circumstances and what can provide you with peace of mind. Keep your emergency fund somewhere safe and accessible, as you may need to access the funds quickly if an emergency develops. You should open a money market or savings account as soon as possible. However, always double-check their offer for the interest rate, minimum balance, and other details.
You can stop when you think you've saved enough. You may now relax and start putting your surplus money into higher-interest, less-accessible accounts or investments.
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