Setting up an emergency fund

Setting up an emergency fund

May 29, 2018

Read any book on personal finance or managing your money and one common thread will the emergency fund. Almost every single one will tell you the first thing to do is to open and contribute to an emergency fund. The recommendation is to prioritize this above all other non-essential payments. Here are the basics of the emergency fund:

The first is to decide how much you want to commit to the fund. The basic idea is that the fund will be able to handle all expenses in the event of unemployment or an emergency. When factoring the amount, the recommendations are for either three or six months of total expenses. Obviously, six months is better than three. However, if finding employment is not going to be an issue, then three months will suffice.

The next is to open the account. Since the funds need to be liquid avoid term deposits or any form of long-term savings vehicle. Those are better suited for retirement. Ideally, we are looking at a high rate savings account that has a low number of withdrawals allowed. This way the interest will contribute to the fund itself.

Finally, figure out how much of your income can be contributed to the fund. The sooner the fund hits the target; the sooner you can start contributing to retirement or something else. Remember that once you hit your target, you can sleep well knowing that you can survive for a few months without dipping into your savings.