Why You Need an Emergency Fund

The one thing that is certain in life is its uncertainty.  You never know; you could be living in the lap of luxury now, then some untoward incident happens that drastically changes your fortunes in a flash.  You could lose your job, your house, or your health, and if one isn’t prepared when disaster strikes, the consequences can be costly.  This is why it is important to set aside an emergency fund to draw from in the event of a crisis. It is useful to have a separate emergency fund set up so that you wouldn’t have to dig into your regular savings when the unexpected occurs.  And another advantage of having a fund is that it would keep you from getting into debt.  You wouldn’t have to borrow money to pay for your emergency expenditures when you have your fund to rely on.  And if you normally pay with a credit card, having your emergency fund cover the expenses instead frees you up from further credit debt. When building an emergency fund, the ideal amount to set aside is around 3 to 6 months or even a year’s worth of living expenses.  This is because the most common emergency necessitating a fund is abruptly losing one’s source of income.  Since it may take a while to get a new job, it is good to have a sizable amount stashed away to supplement your regular budget until you do. Speaking of jobs, you could also take a sideline job and use that extra income to feed your fund.  But you don’t have to pressure yourself into earning a large amount for the fund right away.  You can perhaps start with allotting a small portion of your regular paycheck into the fund and watch it grow gradually.  Or maybe you can cut back some unnecessary expenses from your budget, and the money that you would save will go to the fund. When investing in an emergency fund, it is vital that it be kept where it can be easily accessed at the quickest amount of time possible.  Ideally, it should be placed in a safe, liquid investment.  By “liquid,” we mean that it should be converted into cash without difficulty.  You can place the fund in an ATM savings account, preferably with a bank that has the largest number of branches, so you can have easy access to your money at any time from any location when needed. You can also look for banks that still offer passbook savings accounts.  Such accounts may not be as convenient as an ATM, but it would at least restrain you from the urge to withdraw your funds just any time you feel like it even when there isn’t an emergency. If you decide to go with a passbook, choose a bank that has a branch close to your place of residence and offers a competitive interest rate. Also, you may opt to try other investment vehicles such as time deposits or money market mutual funds but make sure you choose one that does not have a lengthy holding period.