An emergency fund is a fund that is allocated for any emergencies. In the event of any unexpected events or unplanned situations, this fund can be used. This fund is designed to meet capital expenses, it is not for routine expenses. Emergency funds are designed for unanticipated financial needs.
Depending upon the income that you earn and the expenses that you spend, an emergency fund can be for 3 to 6 months of monthly income. For example, if you are earning AED 30,000 a month and from that AED 15,000 is spent towards living expenses. The amount towards the emergency fund can be in the range of AED 45000 to AED 100000.
How long can emergency funds save you?
Every individual keeps some money in a savings account. The reason for having an amount in a savings account is to use the money for any kind of emergency. Many people do not know how much is an adequate amount that is required to meet any critical expenses. Many people think that emergency funds are used only for medical emergencies or health and hospitalization.
Emergency funds are also used for any uncertain events which may be different for different people. A sudden loss of job or salary cut or any other financial emergency can also usually affect your regular activities. In these situations, you need an emergency fund.
There is no Thumb Rule for how much amount you have to save for an emergency fund. Financial Advisors keep advising people to have emergency funds equal to 2-3 months of their living expenses. These living expenses include utility payments, insurance premium, school fees, EMIs etc.
Depending upon the profession, spending habits, personal situation, or working situation the emergency fund should be more than 3 months. A person who has a pre-existing medical condition should have more than 3 months of emergency funds. Pre-existing medical conditions include any ailments or Diabetes or any medical disorders in the body.
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Emergency funds are used for the basic survival of an individual. We realise the importance of basic things when we are in need of them. It is very important to evaluate your emergency fund. Evaluating your emergency fund and introspecting it, is very important.
If you think it is not sufficient then increase the emergency fund amount. Do not use emergency funds for any other purpose other than for what it is set up. The main aim of an emergency fund is to be financially prepared for any situation that life puts you in.
It is very important to keep in mind where you are keeping your emergency fund. When you are in need of money you should be able to withdraw your emergency funds. You should also be sure that you are not paying any penalty for using your emergency. The amount that you invested in an emergency fund should not go down; it should have a value add to the amount that you invested.
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How do I build an emergency fund?
- Calculate the amount that you want to invest in the emergency fund. There are many online tools and calculators available to help you in figuring out your expenses for the future.
- Have a monthly saving target. This will enable you to make savings regularly and it will reduce your burden. You can set up a system for automatically transferring funds to your savings account.
- Divide your Monthly pay into two categories: Priority and Non-Priority expenses. Include monthly savings in your priority list. By doing this your monthly savings goal can be achieved.
- There are apps that focus on savings and every time you make a purchase you save on your spendings. The extra amount you earn can be directly put into your savings account. By using mobile technology you can save money every time you make a purchase.
- Assess and adjust your spending. Check your savings and make adjustments if needed. If you saved money which is enough for 6 months and have extra money you can invest additional money into the fund.
Conclusion
When you are in a financial crisis, emergency funds will give you the hope of overcoming the challenge. Financial experts give the advice to have a habit of saving money. Savings can be invested in emergency needs. You can assess your monthly spendings, your income, size of family, anticipated expenses and consider other factors then decide on the amount you want to set up in the emergency fund. Your Emergency Fund will come to your rescue when you are in a financial crisis.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
