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Emergency financial situations can happen to anyone and no financial management practice is ideal without planning for such eventualities. The whole idea of having an emergency fund is to provide protection against any unforeseen expenses.
This will ensure that it does not have any negative impact on your financial position and does not destroy the entire financial security.
There are many situations that can lead to a financial emergency such as sudden illness, accident, medical emergency, emergency home repair, job loss, emergency car repair and many more.
The major reason for having an emergency fund is very clear because when a person falls into an emergency financial situation, he/she will have to break his/her savings or compromise in order to get the required funds.
It is not rare to find people who pull out their credit card and swipe it for hard cash. Contrary to popular opinion, credit cards are the worst way to fund any financial emergency. the fastest way to get thousands of dollars is to get a car title loan It is not a long term solution but a short term solution.
In a situation where you have taken a cash advance from your credit card to get the required funds, the credit card company will charge you a cash advance fee along with the interest rate. This is a very expensive way to borrow and manage finances for emergency situations.
So, what is the best amount that should be set aside as emergency money? There are different opinions on this. Some professional experts agree that at least 3-6 months of monthly income should be set aside for emergencies. This amount may vary according to marital status, family size and lifestyle.
Everyone should keep some extra cash reserve for emergencies. But, the amount to reserve depends on your income and monthly expenses. The amount you need for your emergency fund is open to debate, the minimum amount should be enough to cover your expenses for daily living for at least 3 months. Saving for 6 months is also ideal, even though few financial advisors agree on a whole year’s worth of cash.
These funds should be set aside in an instrument that is easily accessible when needed. This can be money in a bank account, hard cash, liquid funds or fixed deposits. This will ensure that funds are always available immediately or within a short period of time when required.
where to keep the cash
Your circumstances and what can give you peace of mind are factors that can help you determine how vigilant you want to be. Keep your emergency fund in a place that is safe and accessible because you may need to withdraw cash quickly if an emergency arises. The best option you have is to open a money market account or savings account. But, always check their offer with respect to interest rate, minimum balance amount and other terms and conditions.
When you feel you have saved enough, you can stop. You can sleep easy now and try to start putting your extra savings into high-interest and low-access accounts or investments.
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