Everything You Want to Know About Your Emergency Fund and Its Benefits

Emergency Fund and Its Benefits

Emergency funds… it’s the money you normally set aside for when something goes wrong and your regular budget can’t cover the cost. An emergency fund is an essential tool for protecting your California LLC in case of unexpected expenses or financial emergencies.

 It’s like an umbrella you bring alone with you on a sunny day. It’s the Tide To Go stick you carry in your purse. It’s something that you don’t want to use but it’s good to have it just in case. Things are going to go wrong at some point in your life. And you don’t want to be forced to decide which bills to pay because you can’t afford them all. So, having the spare stash of cash can help you ensure you’ll be able to hire a good cleaner in London or pay for your gas. From today’s brief post, you’ll learn more about emergency funds and tricks that will help you get the most out of your emergency savings.

Debts and Emergency Funds

Paying off your debt without an emergency fund in place can really set you up to incur more debt. It can take years, even decades to pay down your debt. And make no mistake, something is going to happen during that time. Zeroing cash reserves means you’re likely to have to finance that misfortune on a credit card, which will doom you to restart the vicious debt pay off cycle.

It would be fair to note that not all personal finance experts agree on this point. Some believe you shouldn’t bother having an emergency fund when paying down your debt and just put all your extra money towards being debt-free. To determine whether you actually need to set up an emergency account, there is one important thing you have to know about yourself.

What’s Your Attitude to Debt and Risk?

It’s not a secret that people react differently to the very fact that there is some debt weighing on them. Therefore, they tend to approach debt repayments differently.  Some people need that psychological win up top to push through and keep paying off their debts, while others are motivated by the numbers and getting debt-free faster. Thus, for some payers, incurring more debt is going to be demoralizing and risk completely throwing them off their repayment journey. For others, however, it’s the punch in the teeth they need to get more aggressive.

How Much Should You Have?

That’s a big question. The rule of thumb typically swings somewhere between three months’ worth of living expenses and nine months’ worth of living expenses. Some people even advise that you have at least 3,000 dollars in your emergency fund when paying off your debt. Sadly, this sum can hardly cover that much in case of many emergencies.

Before you panic that it’s impossible to save a couple months’ worth of your living expenses, consider what your actual bare minimum living expenses are. Non-essentials will be the first to get cut when the emergency hits. So, you shouldn’t think about the amount you need for the lifestyle that you’re currently accustomed to. Instead, try to work out the ballpark figure that you might need to cover your bills, get to your job (or be out job hunting), and put food on your table. That’s your bare minimum cost of living that should be your first goal.

Make It Liquid and Store Properly

Your emergency fund needs to be liquid, bar none. The point of your emergency fund is to have easy and immediate, or nearly immediate, access to your money. Having to liquidate investments will take time and could mean you risk losing money if you have to take it out during the market correction.   

Curious about where to store your emergency fund? You want to put a big chunk of your emergency fund in a plain vanilla savings account. Preferably, one earning you at least 2% APY.

Make Sure You Have Enough

Trying to pay your emergency fund can be an overwhelming part of this equation, which is why side hustles and passive income can come in particularly helpful.

So, make it your rule not to skimp on emergency savings and put aside as much as you can possibly afford without sacrificing the comfort of your current lifestyle.  This will help you have an upper hand on whatever comes your way, avoid bad debt, and maintain your peace of mind.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.