Planning for financial emergencies

Financial emergencies can happen to anyone and any financial settlement exercise is not ideal without planning for such occasions. The idea of ​​having an emergency fund is to provide a cushion against any unexpected expenses.

This will ensure that it does not have any negative impact on your financial situation and that it does not destroy all financial security.

There are many circumstances that can cause a financial emergency, including sudden illness, accident, medical emergencies, emergency home repairs, job loss, emergency car repairs, and much more.

The main reason for having an emergency fund is very clear because when a person falls into an emergency financial situation, they will have to break their savings or make a commitment to obtain the money they need.

It’s not uncommon to find people who just pull out their credit card and swipe it for cash. Contrary to popular opinion, credit cards are the worst way to finance any financial emergency. The fastest way to get thousands of dollars is to get a car title loan. It is not a long-term solution, but a short-term solution.

In a circumstance where you have taken a cash advance from your credit card to get the money you need, the credit card company will charge you a cash advance fee with an interest rate. This is a very expensive way to borrow and manage finances for emergency situations.

So what is the best amount that should be set aside as emergency money? There are several opinions about it. Some professional experts agree that a minimum of 3-6 months of monthly income should be set aside for an emergency situation. This amount can differ based on marital status, family size, and lifestyle.

Everyone should set aside some extra money in case of emergencies. But, the amount to reserve depends on your monthly income and expenses. The amount needed for your emergency fund is open to debate, the minimum amount should be enough to cover your daily living expenses for at least 3 months. It’s also ideal for saving for 6 months, although some financial advisers agree with a full year of cash.

These funds must be reserved in an instrument that is readily available when needed. It can be money in a bank account, cash, liquid funds or time deposits. This will ensure that the fund can always be accessed instantly or in a short period of time when needed.

Where to keep the cash

Your situations and what may offer you peace of mind are the factors that can help you determine how cautious you want to be. Keep your emergency fund in a safe and accessible place because you may need to get the cash quickly when an emergency arises. The best option you have is to open a money market account or a savings account. But always review your offer regarding interest rate, minimum balance, and other terms.

When you think you have saved enough, you can stop. Now you can sleep easier and try to start putting your extra savings into higher-interest, less-affordable accounts or investments.