Emergency Fund – Necessary Fund for Everyone

The financial advisor will advise everyone to set an emergency fund. Emergency fund will be used for your daily living once you are laid off, or injured or just out of employment, lose or reduce income. The amount of emergency fund is recommended to be around from 3 to 6 times of your monthly living expense. 6 months is better. In these 6 months, you will have enough time to find a new job or recover from normal illness.

If you do not set your emergency fund, please do it now.

First, you need to calculate your monthly living expense. How much is monthly grocery? If you rent a room, an apartment or a house, how much is rental fee? If you buy a house or an apartment, how much is mortgage and utilities and maintenance fee? If you commute with your own car, how much is car insurance and gasoline cost? Any parking fee? And car maintenance fee? If you take bus, how much is transportation fee? Consider other necessary monthly expense also. After listing them out, you can calculate your monthly expense. How much is 6 times of your monthly expense? Try your best to take this amount into a separate account which you can access immediately once emergency.

The emergency fund can not be put into high-risk investment market. It should be easily accessed so that you can use it once emergency. So many people will put it in their checking account. That is not a good idea. They should put it into a high-interest account and can withdraw it anytime. The current good saving interest is around 4%. If you do not use that money, you will earn some interest, after considering average float rate which is around 3% these days. Do you have such a saving account? Higher saving interest is better, but please do consider risk before you accept it.

Many people do not have emergency fund because they think they can use credit card, advance payday load or life of credit. The above financial ways are not good for your emergency need. Their interest rate is too high for you to afford. You will be on the way to bankrupt once you can not pay them off in a short time. The smart people only use the above financial ways only they are sure they can receive much higher return, and only if they can not find any other loan with normal interest rate. So be carefully with high interest loan.