Saturday, December 29, 2012

What is an emergency fund?

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Posted on Saturday, December 29, 2012

Emergency Fund
If you have been following Suze Orman, for sure you would have heard of the term Emergency Fund. For those who are unfamiliar let me share to you what an emergency fund can do for you.

Emergency Fund is basically a lump sum of money that you have saved for a rainy day, it may be that you have laid off your job or you got ill. Emergency fund comprises of all of your expenses from your mortgage, rent, food, transportation, leisure and even your monthly savings. You have to list down all of your expenses and get the monthly average amount. Now, how many months of emergency fund do you need to survive? According to Suze Orman, eight months is a must and if you're wise enough, during a rainy day, you can even stretch that 8 months emergency fund to 1.5 years by cutting down expenses. By that time, you would be back in your feet with a new job.

How to start saving for your emergency fund?

Saving for your emergency fund or even for a regular savings account is really dreadful for some. Seeing your money grow tempts you to spend in one shot. The trick is to allocate a budget for your emergency fund monthly and separate it immediately when you receive your salary. If you can open a separate bank account just for the emergency fund then it is even better. Just make sure not to spend it!

How long to save for an emergency fund?

Saving for an emergency fund should be realistic. You even have to sacrifice some of your expenses if you want to meet your emergency fund faster.

Have a time frame. Lets say in one year you will save for your 8 months emergency fund. If you can cut down your expenses, you can divert all of those money to your emergency fund. If you have received your yearly bonus, why not save it all to your emergency fund or a portion of it?

If you have your 8 months emergency fund already you can still continue to fund this account alternatively you can start saving for your other projects.  You can start saving for your 20% house down payment, invest that money in the stock market and most importantly fund your retirement fund.

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