Fiscal responsibility is a crucial aspect of living a good quality of life. It’s not enough to be debt-free. Working toward a fund is key to being ready for any emergency. An emergency fund is not to be confused with a buffer fund or an income replacement fund.
A buffer fund is an amount you can dip into if you lose your job and you need to pay for your living expenses while you’re looking for a job. An income replacement fund is how you’ll be able to pay for your living expenses when you need a break or if something happens to you and you’re the breadwinner for your family. Emergency funds have priority over these two.
What Is An Emergency Fund?
An emergency fund is used to safeguard your finances from any unexpected expenses you need to make. For example, there are instances where an accident has happened, and you need to be operated on immediately. Or maybe you or someone in your family got pregnant, and it’s not a good time because they’re not ready.
Having money to spare for incidents such as these can really help you and those around you. If someone can’t afford to take care of themselves, it only makes sense to get an abortion to keep the child and the parents from living a poor quality of life. It is important to prepare for situations that you would rather not worsen.
Just remember that an emergency fund should only be used for expensive situations that you didn’t expect to happen. Not having rent for the month is not an emergency. It is a liability that you can prepare for in advance. The purpose of an emergency fund is to protect your finances from taking a huge hit when potential liabilities attack. It’s there to keep you from signing up for credit cards or loans when a family member needs surgery.
As much as possible, being fiscally responsible means that you won’t go into debt unless you can service it in due time. Emergency funds help people accomplish this because they will be dedicated to protecting them from unexpected circumstances.
When Can You Prepare An Emergency Fund?
It’s really up to you when you feel the need to start preparing an emergency fund in advance. You can begin saving as soon as you hear about it if you’re financially able. Putting aside some of your allowance or income for the month for a year can be a good way to provide some cushion for your finances. Some people start with 20% of their income, but, ultimately, the amount you save is up to you.
Others decide to prepare an emergency fund as soon as they start working, while some start once all of their debt is paid off. The most important thing is that you start preparing one.
How To Store Your Emergency Fund
Don’t keep it all in one place. You can keep some as cash so that if there’s a real emergency and you can’t get to an ATM, you’ll be able to run with a good amount and still be fine. At the same time, you need to make that money work for you. Find a way for you to safely store that money while accumulating some interest.
You can’t keep everything as cash because you need to protect your fund and yourself from inflation. Even if you keep your cash at home and guard it with all your life, the rising costs of goods and services can still get to it. By putting it in investment vehicles that can accumulate over time, the money you save won’t get hurt by inflation later on.
One of the ways to store your emergency fund after cash is your savings fund. There is a conservatively small interest per annum, but it’s still something to increase your savings without you lifting a finger. Another way is by investing it in any fund you’re most comfortable with. Not everyone may be into investing, but it’s the only way you can really protect your finances in the end.
Living paycheck to paycheck will not be enough for you to pay for massive hospital bills, unexpected pregnancies, broken yet necessary appliances, and possibly even an equally apocalyptic situation. Finances are fragile. Taking steps to make sure that you won’t go into debt for an amount you can pay is one way you can secure your peace when it comes to money.