(ARTICLE) The Emergency Fund

Personal Finance

Most people do not have an emergency fund.

One of the most important financial steps you can take is to create a fund designated for emergencies ONLY.

What Is An Emergency Fund?

An emergency fund is an account that you use for emergencies

- Loss of a job / Work

- Unexpected Hospital bills

- Car repairs

- Getting injured and needing time off work

This fund is not to be used for things such as a

- New Phone

- Down payment for a new car

- Shopping sprees

The reason many people do not have an emergency fund is that most people do not like to save, and when they do end up saving, they often spend the money on non-essential items like the ones I listed above.

An emergency fund is mainly for people who are self dependent. Meaning they probably live alone and are responsible for all their bills

However, even if you are not self dependent and you’re living with parents, I HIGHLY recommend you get into the habit of having an emergency fund.

Therefore when you do become self dependent, saving money for a rainy day won’t be a new thing in your life.

“How much should I have in my Emergency Fund”

Usually, you want to have 6 months of your monthly expenses saved up in your emergency fund.

This number will look different for everyone, but 6 months provides a cushion in the case of a financial crisis such as a recession.

In my opinion, the best type of emergency fund to have is a 12-month emergency fund.

this gives you more than enough cushion to withstand a year-long recession (recessions can often be short-term and don’t last as long as a depression would).

If you happen to through a job loss, which is a prevalent effect of a pandemic or recession, having a one-year emergency fund will provide you more than enough time to obtain a new job.

And you will not be financially stressed which would cause you to take BS jobs just for the sake of making money to pay the bills and put food on the table.

You will also be able to successfully pay for all of your expenses during this time if you manage your resources correctly.

That’s the trick:

managing your resources correctly.

The first step is to save.

The second step is to manage the money you have saved properly, so your cash benefits you and your circumstances.

“Cool, So Which Type Of Account Should I Put My Emergency Fund In?”

You can either put the emergency fund in a savings account or stock market with a reasonable interest rate is a great place to have your emergency fund.

Such as the Vanguard S&P 500 index fund

Read this article, I explained index funds in detail:

https://www.patreon.com/posts/53361638

If you have an exceptional level of self-discipline, it is perfectly okay to have your emergency fund in an accessible account.

However, if you are less disciplined and know that you will spend the money if you have access to it, then put your money in a less accessible account.

Till next time.