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 essential emergencies (e.g., unforeseen hospital visits, unexpected car repairs, pandemic supplies, job loss, etc.). This fund is not to be used for things such as a new tv, a down payment for a new car, shopping sprees, or the latest iPhone (I think you get the picture).
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.
:: Getting Your Emergency Fund Started
When you do not have the extra cash flow to build an emergency fund, you need to obtain an additional source of income to help you build up the fund quickly.
:: How much money should I have in an emergency fund?
Usually, you want to have 3–6 months of your monthly expenses saved up in your emergency fund. This number will look different for everyone, but 3–6 months provides a modest cushion in the case of a financial crisis such as a recession.
:: What is the best kind of emergency fund to have?
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).
In the event of a job loss, which is a prevalent effect of a recession, having a one-year emergency fund will provide you more than enough time to obtain a new job. 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, not some other business, person, or entity.
:: What kind of account should I use for my emergency fund?
A savings account or money market with a reasonable interest rate is a great place to have your emergency fund. If you have exceptional 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.
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