What Exactly Is It?
It’s a fund set up to meet your financial needs in case of extreme emergencies.
Major life emergencies are a loss of job or a big medical expense. Other forms of emergencies could be salary cut, wars, pandemics (like the COVID-19 crisis).
One must always keep in mind that this fund is for emergencies only. And like Dave Ramsey said "Christmas is not an emergency".
The industry recommendation is to have three to six months of expenses as an emergency fund. But you want to be safe than sorry. Be more conservative. Double up. My recommended emergency fund size ranges anywhere between 12 to 24 months of expenses. It depends on multiple circumstances which we will consider later this week.
What Is The Advantage Of An Emergency Fund?
You avoid making wrong financial decisions in panic.
You avoid resorting to expensive debt.
You avoid dipping in your long-term investments
You know you have something to fall back to.
I will answer the following questions in separate posts over the next few days -
How big should be your emergency fund?
What isn’t an emergency?
Where to invest your emergency fund?
What should be the contribution strategy to set up an emergency fund?
FAQs around emergency funds
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