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Saving for the Rainy Day: The Importance of Emergency Funds

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savingsHaving an emergency fund can help you avoid financial disasters in case you lose your job or if someone in your family fell seriously ill. While securing a signature loan can help you get through difficult times, an emergency savings account gives you a long-term financial solution.

Financial experts have different views on how much a person should save for emergencies. Before calculating your income and expenses, however, it’s important to understand the purpose of your emergency fund.

Safety net

Emergency savings are meant for use in case of an urgent situation. While it’s great to earn higher returns on the amount you save, the reason for this is not to provide you with additional income. It’s meant to give you a financial safety net. So let your savings sit once they reach your goal of covering three, six, nine, or even 12 months worth of expenses.

How much to save

As mentioned above, there are different guidelines for how much you should save. Do some research and pick one (or a combination) method that fits your lifestyle. Here are some of the guidelines that many financial experts recommend:

  • Setting aside 2-3 months worth of salary.
  • Saving for 6 months worth of your living expenses.
  • Starting small and paying off debt before saving for 3-6 months worth of living expenses.

You should earn interest from your savings or else, it will lose value due to inflation. To earn interest, put your emergency fund into a high interest savings accountor money market account.

Can’t touch this

Regardless of the guideline you choose to follow or where you put it, never pull from your emergency funds to pay off miscellaneous expenses. If you’re expecting a major event such as birthdays or graduations, open another savings account.

In the event of a family financial crisis, you can always consider getting a signature loan to weather the storm. Just never stop building your emergency fund. Eventually, you’ll feel more confident that you can handle things should financial hard ships arise once more.

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