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Trying to Setup Your Own Emergency Fund?
The greatest advantage of an emergency fund is that, if your income is affected, or you have an expense for which you cannot cope with the money you receive every day, you can use the money from the fund.
A savings fund or emergency fund is an amount of money available for unexpected situations, such as illness, making an emergency repair, replacing an appliance that breaks down, or paying a fine.
It is essential to have a fund, although at first, it does not seem like a lot of money, with time and perseverance you will make it grow. It allows you to enjoy the security that, even if there are difficult periods, such as the health contingency, you will not have to go into debt. In this way, you will save on paying commissions and interest.
Knowing how much you should save to safeguard your finances is difficult to predict, as much as knowing how much an emergency could cost. However, personal finance experts say that saving three to six months of overhead is a good goal. On the other hand, if that seems like too much, saving even $500 could help you avoid going into debt when repairing your car or paying a medical bill. While financial experts may differ in their money philosophies, all are fairly agreed that having cash set aside for emergencies is a necessary component of building a healthy financial plan. You can start with any amount, then allocate a portion of the money you earn. It is recommended that you allocate between 20% to 5% of your income, whatever is possible for you. If it is less, do not be discouraged, the joke is that you manage to save an amount per month.
Below are a few things you should consider where setting up your emergence fund.
Excessive emergency savings
While most people are concerned about underfunding their emergency savings so that they are not exposed, they should also be concerned about not overfunding their savings. This could cause some additional resources to stagnate with no return and prevent you from reaching certain goals.
Make sure you don’t lose money
Because emergency funds must be accessible, the best place to store them is in a savings account at your bank, credit union, or online bank (where you may be able to get a higher interest rate than at a physical institution). But even at the “higher” end, your money will barely make about 1 percent per year. Your emergency fund, regardless of where you keep it, does not exceed inflation, so you are losing money. In conclusion, having more than you need in your emergency fund could increase your losses.
Don’t lose funding for other goals
If you have too much money tied up in your emergency fund, you are missing out on opportunities to take care of other important financial factors like contributing to your retirement, paying off debt, or saving for a down payment on a home. If this is the case, your money would be better used to meet one of those goals than to overload your emergency savings. Why put more than you need in a cookie jar when you could be paying off your debts and living better?
Determining the correct amount
To determine a sufficient amount of money in your emergency fund, you should consider how much money can provide you with a sense of financial stability, depending on your current employment situation and your financial responsibilities.
As we already mentioned, it is generally recommended that you save between three and six months of expenses in your emergency fund. However, some experts recommend as little as a few hundred dollars to start with a “beginner’s emergency fund”; others suggest up to a year or more of your income. In addition to considering these recommendations, take into account the details of your situation such as the size of your family, whether you own or rent a house, the number of vehicles you rent or own, and your job stability.
Value your emergency fund as insurance
Your emergency fund is an insurance policy: with it, you are protecting yourself if something goes wrong. Therefore, approach your emergency savings in the same way that you would cover yourself, for example, with a car or life insurance. Of course, you want to include an amount that provides you with enough coverage, but not so much that you waste your money on premiums or, in this case, have your money settled without generating anything. You may also skimp on certain forms of insurance that you don’t think you can use. You can also reduce your emergency savings a bit if you feel that your financial position is relatively secure.
While the answer to exactly how much to include in your emergency fund is different for each person, consider these tips to determine the right emergency fund for you and avoid crossing the line to have too much in your savings. Make sure your emergency fund is supporting your overall financial plan and not going against it. Then reflect on what you need. Make a list of goals. and identify those that are most important to your economy. It may seem almost impossible at first to save those amounts (everyone knows their true situation), but if you are honest with yourself when analyzing your financial health and realistic when setting goals, surely it will be possible to save.