July is the national savings month and today I would like to talk about emergency funds. Welcome back to my blog, where I post everything financial wellness related. I have written a post about what financial wellness is, and you can read about it here. As I have mentioned today we are digging a bit deeper into understanding what an emergency fund is.
What is an Emergency fund?
In simple terms an emergency fund is a type of savings where a person saves money and will only use it in a case of an emergency. It is that money saved aside for unplanned and unexpected expenses.
How Much Emergency Funds Should One have?
According to financial experts, it is said that the amount should be at least a minimum of 6 months worth of your monthly income. As long as it is one of your financial goals you are working towards; how many months it covers is really not that significant. It can be as big as you want to be. This is one of the primary financial goals I believe it can help people towards a state of being financially well.
Why are Emergency Funds Important?
Emergency fund prevents you from opting out for debt should you encounter any financial challenges that are beyond your income. In the book Healing The Wounds Of Debt, lack of savings is listed as one of the main reasons people find themselves in debt. It reduces stress of knowing that you can face financial challenges for a certain period of time should you find yourself without income. In a case you find yourself without a job, it gives you the opportunity to job hunt without any pressure. This will then allow you to have options and not take anything presented to you as a job that may end up frustrating you.
Where Should You Keep Your Emergency Funds?
Personally I prefer an account where funds will not be easily accessible but at the same time not very high strict conditions for access. These types of accounts are the ones where you will need a certain notice period to access the funds. If you somehow want them immediately the penalty should be bearable. This will help you with discipline as the money will not be at the tip of your fingers.
When To Use Emergency Funds?
As the name suggests, you use the emergency funds in the case of emergency. In this case, you the owner of the funds, you have the responsibility to identify what an emergency is. This is because if you have not determined that, everything will manifest as an emergency, and you will find yourself accessing the money more frequently than you had initially planned. A few instances of what would be a determination of an emergency would be a job loss, salary cut, disastrous event not covered by insurance and medical expenses not covered by medical aid. These are a few that I have also personally listed them as emergency.
How To Set An Emergency Fund?
It is very understandable that most people do not have emergency funds. The most important thing is to start. Start where you are with what you have. Go to your nearest bank and open an account even if you do not have the money now. Be intentional about funding this account. In your monthly budget set aside a certain an amount just for your emergency fund. Fund it first before everything else. Keep up with the momentum on monthly basis or every time you receive the money. Few months later you will be pleasantly surprised with your progress.
Financial Wellness Tip: In a case you find yourself using these funds do not be discouraged, work twice as hard and make sure you close the gap and keep on building more. Remember all you need is to start with the little that you have
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