You may already heard this many times about saving emergency fund and you may be wondering why is it so important.
What is emergency fund?
Emergency fund is an amount of savings that is readily available for you to handle sudden financial dilemmas or expenses.
It should be saved in a separate saving account ( in a high interest saving account if possible) separate from your usual saving accounts that you use to pay your daily/monthly expenses.
Why is emergency fund important?
So that you do not need to borrow money from your friends, family, financial institutes or overdraft your credit card and fall in bad debt.
To me, emergency fund is also a "safety net" for me to fall back if I am out of job.
Some examples of critical / emergency / sudden expenses that I can think of
- Medical fees
- Vehicle breakdown / major repairs
- Out of job
- House required major repairs
How much to save for emergency fund?
There is no 1 rule fits all. It really depends on individual's needs, expenses and financial situation especially in this current economic environment.
Generally, as a guide, experts usually advise 3-6 months worth of your household / individual's expenses according to Business Insider and Investopedia. Of course you can save more if you can to feel more secure.
In my own opinion, if is possible, an employee (working an earned income) should save at least 6 months of household / individual's worth of expenses.
How to start building emergency fund?
I'm trying to work towards the followings:
- Track household expenses in order to know how much is needed for the emergency fund.
- Set up a monthly budget to control expenses to come up with money for the emergency fund.
- Pay yourself first a fix amount or percentage of my monthly income consistently for my emergency fund.
- Purchase essential needs and not wants.
- Live below your means.
- Will find part-time job to earned extra income during free time.
- Add value to the company that you are working in order to keep my job.
- Cook meals more often instead of dinning our or order food deliveries.
- Buy essentials items when there is sales or discounts
The ways I mentioned above may or may not work for you depending on your current financial situation.
You can google and find many other better ways that suit you.
Let's try to work towards building our emergency funds.
