Everyone dreads a household emergency – a blown geyser, a broken refrigerator, or a sinkhole in your driveway. If you’re prepared, however, your emergency doesn’t have to leave a hole in your pocket.
Emergency fund savings play an important yet frequently unappreciated role in a good financial plan and is often the glue that holds the plan together.
By their very nature, emergencies are unpredictable and require immediate attention – and usually money – at short notice, to help alleviate the problem.
Without an emergency fund you can be forced to dip into your other investments in case of an emergency, or you may be forced to borrow money and thereby create unwanted debt.
For example, if you are saving for your child’s education and you have an emergency not covered by your insurance, you might be tempted to access the education fund.
This is where an emergency fund is vital. It is prudent to build up a solid emergency fund to deal with life’s unexpected financial challenges without having to derail your financial goals.
There is no real hard and fast rule that determines how much should be saved in an emergency fund, but three times your monthly salary is a good start and provides a nice buffer.
Here are five tips you should you bear in mind when choosing a savings fund for an emergency.
Easy to access
Your money should be easy to access in a relatively short period of time. It should not be locked away subject to long notice periods and penalties when withdrawing.
Low risk Funds
Avoid investing your money in high risk funds. Ideally you should save for emergencies in a money market fund. These funds are low risk funds suitable for short term savings and readily available to use for those financial emergencies.
Choose funds where your fees are kept as low as possible. Over time fees have an important effect on your funds.
When you have reached your emergency savings buffer (3 x monthly salary), consider saving for other goals by opening new savings goals and leave your emergency fund in place to grow over time.
Top up what you have used
When you need to withdraw money to cover the costs of an emergency, make sure you continue to save and top up your fund again to reach the suggested buffer.
A good emergency fund goes a long way in helping you be more prepared for life’s unexpected financial emergencies.