Emergency Fund: How Much Should You Have in Your Cash Fund?
There are plenty of things that a lot of people save for. That may be a new car or perhaps a new house. But, there is also an essential thing that you need to have that most people urge you to do- have an emergency fund.
What is that exactly? Well, the emergency fund is an account wherein you put money into it and that money will be used for whenever you encounter a financial dilemma such as unwanted accidents, an unexpected occurrence, or perhaps the loss of a job.
Whatever it is, that money is set aside for such cases. I am going to cite some reasons as to why you need one:
1. To Pay for Unexpected Events
Accidents can happen at any time and you might incur damages that will require a lot of cash. An emergency fund helps alleviate your financial woes in case an unexpected event happens.
2. Financial Cushion
If you only have one source of income, it could be very devastating for you if you lose your job at any time. That is why it is imperative that you have an emergency fund set aside so that whenever it happens, you will have a financial cushion ready to assist you.
How much you put into this fund will depend on your current circumstances. Typically, you want to apportion the remainder of your salary into this fund (around 10-20% of your monthly pay is considerable).
3. Helps Pay Your Debts
If you owe some lenders some money, your “rainy day fund” can help you pay them. This is especially useful for people who have credit cards since they have a higher interest rate compared to other financial options.
4. Helps you Buy What You Want
The emergency fund’s use is not limited to just accidents; it can also help you finance something that you’ve wanted to buy for a long time.
Most people use some amount of their fund to help them buy their dream house, for example.
If you really want to set aside the fund for emergencies, but you still require some cash in order to acquire something, a cash advance would be better for you.
How Much Money Do You Need on Your Account?
To answer the question, you have to look at your finances. The key here is to deduct your monthly salary by taking into account the bills that you have to pay as well as your cost of living.
Once that has been deducted from your salary, the remainder of that should be saved to your emergency fund.
Most experts agree that you need to have, at least, a years’ worth of cash in the fund so whenever an unexpected event occurs (such as a job loss, for example), the money will be your cushion for the time being until you land your next job.
Is it Safe to Invest Your Emergency Fund?
Before you can answer this question, you have to ask yourself if you’re willing to take the risk. Another thing you need to ponder on is where you will invest the money if you want to take this route.
The main idea here is to only invest your money if you’re absolutely certain that you have enough left in the account. In other words, do not put all of your eggs in one basket (invest).
Second, invest in something that will surely help you increase your chances of getting a higher amount. For example, investing in real estate is a good option.
No matter what, you definitely have to have an emergency fund. This is so that you will not run into any financial problems in the future.