The Importance of an Emergency FundBy: Sheena Lindo, Account Executive Posted:
All too often we hear our parents and grandparents saying that they are putting something aside for “rainy day”. Only when we are faced with adversities, then we truly realize the importance of the need to have “something set aside” to deal with those unexpected issues. Having money to cover unforeseen expenses can bring you peace of mind and prevent you from taking on unwanted debts when such events occur.
It is important that we never keep our head in the sand and always keep a mindful eye on the twists and turns that life can throw at you. In order to be able to handle those unexpected events it is important to start and maintain a means by which you can access funding immediately.
An emergency fund is essentially money that has been set aside to cover any of life’s unexpected events. This money will allow you to live for a few months should you happen to lose your job or if something unexpected comes up that will cost a fair chunk of money to cover. A good benchmark is to have at least 6 months income set aside – untouched – in the event of an emergency. Please note this is merely a benchmark and does not limit you.
In financial planning having an emergency fund goes hand in hand with establishing an investment fund to meet any of your financial objectives such as education, retirement or major purchase. The emergency fund allows you the opportunity to allow those investments to remain relatively untouched for a period during unforeseen circumstances such as:
- Loss of job
- Natural disaster
- Medical emergencies
- Major expenses to major assets such as home or motor vehicle
Getting started on establishing fund will require setting aside a small portion of your salary monthly and build on this over time. This fund should be out of sight but not out of reach. Ideally funds should be held on an instrument where your principal is persevered whilst you earn a small to moderate rate of return such a Savings Account or a Money Market Fund. These options will provide:
- Stable/consistent returns
- Ease of Liquidity
- Preservation of Capital
Life is filled with unexpected twists and turns; it is how one deal with it that determines how well you can manage. When the unexpected happens, you can say “Oh No what do I do now?” or “Lets go, I got this!” Plan for the expected and prepare for the unexpected.