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    How Much Should Be In My Emergency Fund? Types of Emergency Fund

    How Much Should Be In My Emergency Fund? Types of Emergency Fund

    Not all emergencies are created equal. There are three constants, though, in any situation. They frequently present an unexpected and imminent threat, necessitating prompt action. The latter is the most typical characteristic of crises. They show up unexpectedly, without notice. It’s impossible to know when they’ll happen.

    Plus, emergencies have a way of setting you behind monetarily. Being prepared is the only way to prevent this from happening to you. An automobile accident, job loss, illness, or the sudden need to repair a home item can all have a significant impact on your ability to make ends meet. An emergency fund might help you weather any unexpected expenses that may arise.

    What Is An Emergency Fund?

    Another name for a savings account set aside in case of unexpected expenses is a “rainy day” fund. An emergency fund is a savings account used to prepare for unplanned costs.

    Contrast an emergency fund with a retirement or college savings account. Instead, it’s a fixed percentage of your monthly take-home pay that you set aside specifically to cushion your finances in the event of a sudden, unexpected expense.

    A well-stocked emergency fund will protect you from financial ruin in the event of an unexpected expense. It protects your financial stability in the face of unforeseen difficulties.

    How Much Should Be In Your Emergency Fund?

    Now that exact amount that should be in your emergency fund is dependent on you. The amount in your emergency fund is determined by how much you earn, the type of lifestyle you live, monthly expenditure, and family obligations. Also, the economic situation of your city or country affects the amount of money that gets into your emergency fund. 

    Generally, it is advised that the emergency fund should be able to cover three to six months of day-to-day expenses. The emergency fund should include basic cover expenses such as groceries, rent, utility bills, gas, e.t.c.

    One of the advantages of an emergency fund is that if you lose your job, you can live comfortably without going into debt for at least six months before you get another job. 

    Now starting and maintaining an emergency fund is no small task. It takes discipline and commitment to see it through. But it is often advised that you start small. At the end of every month, take a budgeted sum from your salary or income and keep it tucked away in your emergency fund. When done consistently, the fund grows bigger and can save you when emergencies drop by unannounced. 

    Where Should You Put The Money?

    The money in your emergency fund is best kept in an interest-bearing bank account such as a money market or interest-bearing savings account. It is not enough to keep the money; the savings should also accumulate interest over time. The benefit of keeping the emergency fund in such an account is that you get little returns from the money you saved. And in most instances, this would motivate you to consistently maintain the emergency savings. 

    Nevertheless, the interest-bearing bank account should be easily accessible without paying taxes or penalties. If this is not the case, then it defeats the whole idea of the emergency fund in the first place. The fund is designed to be readily accessible so that you don’t crumble under any financial weight the emergency might bring.

    It is often advised that you shouldn’t put your contingency fund in mutual funds, stocks, or other financial assets. This is because they might not be easily accessible when you need them, or they could lose their value because you need them quickly.

    Using The Emergency Fund

    When building the emergency fund, it is best to set a specific amount that should be in the account at any time. Now, you are only expected to access the fund when you are faced with expenses from an unforeseen emergency.

    And while taking money out from the account, note down the amount withdrawn as it tells you how much you have to put back to replenish the account. The goal of the emergency fund is defeated if you keep removing money from it and you are not actively rebuilding it back.  

    Finally, building an emergency fund requires two steps: a desire to have one and taking action immediately by saving money inside. 

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