Planning for Emergencies
Overview: No we’re not going to talk about one of those safety drills and evacuation procedures although those could also be very important. We are going to talk about the all important Emergency Fund.
An emergency fund is the pool of money that you will use when facing emergencies that can’t be covered by a set of insurance criteria or because there wasn’t insurance to begin with.
An emergency fund should be very liquid. What does this mean? It means that if one needs the money, he or she can readily take these funds and use them immediately. In most recommendations, they will always tell you to put it in a bank. Other investments have holding periods, but a simple savings account can readily be tapped into. All one has to do is go to the bank or even an automated teller machine and withdraw the much needed funds. That’s short and sweet, no complications.
Now how much one should set aside for emergency funds? Most would recommend three months to one year worth of living expenses. Why is that so? Normally, a person gets money from his job. He goes to work and gets paid for that work. Others get money from assets. But mostly in these cases, the assets have been insured in case of a loss. So there’s not much of a problem for those kinds of people. So it’s always good to build up assets. But anyway, if a person loses a job, that then can qualify as an emergency. He couldn’t use his insurance if it doesn’t fall into an insurance coverage. And in most cases, insurance like this covers for income if only a person gets hospitalized. He shouldn’t use his investments either as this would incur penalties or even disrupt his money from taking advantage of compounding interest. Where can a person go to for this type of situation?
This is where the emergency fund comes in. He can use the money from there to spend for his bills, rent, food, and other needs. So going back to our question, how much should one set aside for emergency? This depends on where you are and the economic conditions you are in. If you have a job that can easily be found in 3 months, then your emergency fund can be three months worth of living expenses. If it takes six months to get a job or find a business in your part of the world, then cover six months of living expenses. That is it. There is no one perfect answer to that question. Just remember that it should always be equivalent to how fast one can realistically recover from a loss of income.
To wrap it up, you should always remember these 2 important things:
1. Keep your emergency fund liquid, preferable in a savings account with a bank.
2. Make sure you know how much emergency fund you need, and this depends on a case to case basis. spasms zyprexa
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