Being prepared in case the unexpected happens
Nobody can predict the future. Something bad can happen that could create an unexpected bill or loss of income. It is important to have money set aside to cover that unexpected expense from an emergency. An unexpected expense could be a medical bill for a hospital visit, a car repair for a car accident, or damage to a house from a storm.
Defining What an Emergency Fund is
An emergency fund is money that you have available for you to spend in case of an emergency. An emergency fund is not money that you use on a regular basis to cover your routine personal expenses. The emergency fund money should be placed in a separate bank account apart from your regular checking account. The emergency fund money should not be invested in the stock market or a risky investment account. The emergency fund could be lost and not available when needed if placed in risky investments. Also, the fund should be in a cash account and not an account that is a difficult to access.
How to Build an Emergency Fund
There is no one right amount for an emergency fund. Some recommend 3 to 6 months of personal expenses. Others recommend 8 months or a different period of time. We recommend holding an emergency fund to cover 6 to 9 months of expenses. It can take several months to find a new job after losing a job. It can also take several months to recover from an illness or medical surgery. It is better to have more money saved up instead of running out of money.
Suppose a person has monthly expenses of $1,000 and wants to build up an emergency fund.
Example 1: Monthly expenses $1,0000
Number of months X 6 months
----------------------
Emergency fund $6,0000
The person does not have that much money available to set aside at this time.
A monthly savings plan can be used to build up the emergency fund.
Emergency fund $6,000
Monthly savings $300
Months 6,000/300 20 months to save fund
This person will have to set aside $300 a month for 20 months to build up an emergency plan that will cover 6 months of expenses.
Better Safe than Sorry
Nobody wants to get evicted from an apartment for not paying rent. Nobody wants to suffer in pain without getting proper medical or dental care. Being prepared with enough money to cover an unexpected event may be critical. An emergency fund can provide the necessary money to address the problem and limit the damage. It is there just in case the unexpected happens. It is better to be safe than sorry.
Lakeside Financial Consulting provides financial consulting services to address financial questions and problems. This includes setting up emergency savings plans, health insurance consulting and investment advice.
Written on: 11/11/2020 - article for use by Lakeside Financial Consulting only.
