Our life is uncertain, we even do not know, what will happen while crossing the road. You should expect the unexpected, and this is why you need an emergency fund.
Financial emergencies can come in any form like job loss, medical expenses, home or auto repairs or something you’ve never dreamed of. The last thing you want to do is forced to rely on credit cards or a loan which could simply compound the problem. So Emergency Fund is a must.
How Big Should Your Emergency Fund Be?
Emergency fund could be 3-6 months of you are monthly expenses sometimes 1 year of monthly expenses.
The emergency fund will protect your long term investments like investments in mutual funds and equity to get liquidated during the time of financial emergency. Most of the people don’t keep emergency fund with them and that’s why they have to liquidate their long term investments during the time of emergency.
Where to Keep Your Emergency Fund?
It is important to keep this emergency fund in a place that will fairly liquid so that you can get to the money quickly in the event of an emergency. Remember emergency fund is not for investment however if you still want to invest, keep it in such a place where you can liquidate as require and where there is no risk at all for example Saving Account.
- Your credit card is not the emergency fund.
- Your wife's birthday is not the emergency.
- Emergency fund is mainly for the financial emergencies like medical emergency.
- Emergency fund is not for investing or playing in stock market.
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