Building An Emergency Fund – Vital Part of Financial Planning

emergency-fund

In life you should expect the unexpected, and this is why you need an emergency fund. The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution.

None of us have the ability to foresee the future or predict the hurdles which lie ahead of us. This makes building an emergency fund a financial priority. People who are living on a lean-and-mean budget will have the toughest time setting aside money for emergencies. If it’s possible to squeeze out another $40 or $50 each month and put it in a money market account, it’s worth doing.

Establishing an emergency savings account is vital in good times and in bad. The purpose of the fund is to sock away three to six month’s living expenses. But this money could also be used when you’re staring at major, unplanned expenses such as a car breakdown or a leaky roof.

Housing a small rainy day fund should be a vital part of an individual’s financial goals. This is of high importance if you don’t already have readily available funds in your account for covering any unanticipated expenses. They provide financial security because they give you funds to fall back on if you become ill, or if you or your spouse loses your job, you incur large medical bills, or have an unexpected large bill such as a major car or home repair. You do not want to end up in a situation where you have to buy daily necessities on credit.

Saving your money in a small account for emergencies is definitely a better alternative to taking a loan or cashing in your long-term investments. If you take a loan, there is the additional burden of paying interest. Encashment of your investments before maturity means not only will you lose out the interest, but also some part of the original investment. This will also set you back significantly in your overall financial plan.

I echo the idea of treating the emergency fund as a bill, put the money away and don’t be tempted by the latest sale. Success at building an emergency fund depends on consistency of saving money on a regular basis and keeping this money separate from the general savings account. Otherwise you will be tempted to dip into these monies even if you simply run over your budget at a certain point.

The size of the special savings account will depend on your personal situation. I always advice my clients to keep between three to six months salary in the reserve. But you will have to decide on an appropriate amount based factors such as your Dependants and fixed monthly expenses.

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8 Responses

  1. It’s always a good thing to have put some money aside, whateever happens you won’t have to work double-hours to compensate for this “unexpected” expense. expect the unexpected and save some money. It happened to me not so long ago, i had saved a good amount of money, and stuff happens, i lost about the same amount on something else (sometimes even the best ideas don’t work..) and god was i happy i had saved that money! Or else i would have been in deep s*** :) hehe

  2. Robin Bal says:

    Hey Jon,

    There have been a few situations when I was a lot younger, where I have been in DEEP S*** or was it dire straits 😉 , awww man thats not an enviable spot. “None of us have the ability to foresee the future or predict the hurdles which lie ahead of us.” Thats the first line of my post and man its so true.

    Now I practice what I preach (financial planning). You are right, stuff happens, got to be prepared for it. Thanks mate for your comment.

    Take care and Cheers

  3. Jag says:

    Hi Robin,

    I actually wanted to write a post about the importance of having an emergency fund, but looks like you beat me to it! 😥

    This is an important message you are sending out here. This is especially so when it comes to doing a business.

    Good post, as always.

    Cheers mate!
    Jag

  4. Robin Bal says:

    Hey Jag,

    Thanks for your comment mate, sorry I beat you to it but you can always link up, no sweat. I am sure you have a few more ideas on this post up your sleeve 😉 .

    Cheers and take care.

  5. Jag says:

    Sure thing.

    I’m constantly amazed by the great content you post here. You are really doing a good job for your blog so far mate. 😎

  6. Robin Bal says:

    Thanks again buddy.

    Cheers

  7. Anna says:

    I wish I had thought to set aside an emergency fund before 3 years ago when I could have used it. Hindsight! Cheers.

  8. Robin Bal says:

    Hi Anna,

    I have wished the same at times. Its never too late to start setting up an emergency fund, stuff happens and we never know when. Be prepared for the storm. Thanks for the comment.

    Take care and Cheers.

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