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Emergency fund. Why you need one?
Let’s say you are a young person after leaving college and have a new well paid job, maybe even have left home. The amount of things that suddenly become available to you is colossal.
How strong is the pull to spend all that new income, however, how vital it is to quickly develop the right habit of saving!
It is essential to have an emergency fund set aside to cover unexpected expenses, normally 3/6 months of usual expenditure.
It is good to have an emergency fund in case of the unexpected and not planned ‘what ifs’…
What if you will decide to open a new business in 5 or 10 years and the banks will not give you the support you might need at that time, possibly ruining your dream business. Savings will put you in control!
What if you will be desperate to buy that new car — your savings will let you negotiate a much better price as you will be buying it with cash, without monthly car payments!
What if you decide to buy a holiday home and will need your own deposit. Your negotiating will go much better when you have a significant amount to put down as payment for your dream property. Very likely the interest rates would be lower and more than likely your financial position will allow you far more choice!
What if you wanted to step out and travel the world for a year, having money for this would make your journey so much easier!
What if you would want to give your money for charity purposes to help build a school, or buy Christmas presents for the children in an orphanage, savings would facilitate this too!
There can be 1 million ‘what ifs’ and whatever the reason it is always best to be prepared!
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Frequently Asked Questions
What is an emergency fund?
An emergency fund is a separate saving or bank account used to cover or offset the expense of unforeseen situations in your life. These unexpected events can be stressful and costly.
The purpose of an emergency fund is to improve financial security by creating a safety net that can be used to meet unanticipated expenses, such as an illness or major home or repairs, car replacement or loss of income.
How much money should you have in an emergency fund?
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months’ worth of expenses. This amount can seem daunting at first, but the idea is to put a small amount away each week or two to build up to that goal. You may also want to consider adjusting the amount based on your bill obligations, family needs, job stability, or other factors.
Where should you put the money?
Emergency savings are best placed in an interest-earning bank account, such as a money market or interest-earning savings account, that can be accessed easily without taxes or early-withdrawal penalties.
When should you use this money?
The goal is to tap your emergency savings only for expenses directly related to an unexpected emergency. By setting a specific amount that should be in that account, you will know how much to build up to. When you draw from the emergency savings, you’ll then know how much to contribute in order to replenish the account. When you do have to take money from this fund, it’s important to start rebuilding it as soon as possible.
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