How Much Should You Set Aside for an Emergency Fund?
There is a common saying that danger knows no stranger. The same may apply for financial emergencies. Professional risk managers will advise you this. You can either do away with an unnecessary risk or outsource or employ someone to take on a peril on your behalf. However, there are situations where you just have to take on the threat but minimize the impact of such an occurrence.
Just as the name describes, emergencies come along with financial implications. We often end up running to crisis bailouts such as moneylenders who are open on Sundays or relatives to help us out. Sometimes what we have set aside to cater for emergencies falls short which leaves us in the same misery.
Here’s a guide on how much you should set aside for an emergency fund.
Know Your Average Monthly Expenditure
Before you establish a target amount to reach, the objective should be well spelled out. For example, most personal emergency funds are meant to cover crises such as loss of income. Therefore, your average monthly expenditure will determine the amount to be set aside. To help you with this, you can use different budgeting apps and expense tracking apps. I recommend setting up a reserve of at least six months of expenditure.
Building and Sustaining the Fund
Now that you know your average monthly expenditure, one of your priorities should be setting up the emergency fund. Do away with unnecessary expenses and dedicate the extra money to building the reserve within the shortest time possible. To ensure you reach your target within a short period, sacrifice and change your spending patterns. By doing so, you will be reflecting the reserve as a core priority in your budget.
Safeguarding the Fund
This may sound ironical because the fund is to protect your financial well being. However, the reserve should be used only for emergencies that the cost implications will inevitably befall you. Here’s what I mean, you can insure against predicaments such as illness, accidents or incidences of crime. Therefore, you must have adequate insurance to cover your risks. In the event, your health cover is employer provided, still ensure you purchase your insurance cover to cater to your health needs in the event of a job loss.
Multiplying and Accessing the Fund
Make regular contributions to the reserve even after you have reached the target amount. If possible, invest a portion of it. Why? Because you should try to multiply your money. Since it is a backup deposit, it must be accessible on demand. Therefore, we recommend putting it up in a savings account with good interest rates. You can also invest in securities that are highly liquid and have low risk such as the Singapore Savings Bond.
To wrap up, an emergency fund is a must for everyone, if you don’t have one, the guideline above will assist you to know how much you should set aside for an emergency fund.
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