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What Should Your Emergency Fund Look Like

You never know when emergencies will strike. Neither do you know what kind you’ll face. This also means you can never tell the amount you’ll spend to sort out the issue. Whatever the case, emergencies should always get you prepared with enough money.

But how much is enough for an emergency fund? Read this article to get answers to this question.

Don’t Save Much More than You Need

Many people worry about underfunding the emergency funds, which can leave them exposed. Overfunding the funds is also a big mistake. This is because emergency funds sit in your account without generating any returns.

Saving with banks, credit unions, or online banking methods ensures you earn some interest. But this will only be 1% annually, which doesn’t make a difference. Emergency funds will not outpace inflation; hence you’ll only incur losses.

Consider the Recommended Fund Amount

It’s not easy to determine the correct amount for your emergency fund amount. But what you save is usually incline with your earnings, work situation, and financial needs.

No matter how much money you have, setting aside a few hundred dollars every month can be a good start.  Three to six months of emergency saving for your income can be enough. Make sure you consider other things such as housing, school, and job stability when deciding how much to pay for an emergency.

Know the Exact Amount You Need

The emergency fund calculator can help you determine how much you need to save. The three to six-month calculation only refers to your expenses. For a single income household, aim for higher.

Take a look at you’re actual expenses to help you have a proper budget. This will follow the rule of necessity versus discretional spending. Add the costs of every item per month and multiply by the specific number of months you intend to cover. The result is your target fund size.

Emergency Funds Should be Like Insurance

Just like an insurance policy protects you in case anything goes wrong, emergency funds do the same. Therefore, you need to treat your emergency funds, just like insurance. It should be enough to cover you whenever you need them, but not too much to end up being a waste.

If your financial position is secure and you think you won’t need to take an emergency loan in hard situations, lower the amount. But with fluctuating income, you need to put aside more money for an emergency. Once you have a definite number put aside, don’t feel compelled to go beyond that.

Find Emergency Funding Alternatives

There are alternative ways to set aside some money that you can use during an emergency. The alternative should be flexible enough to allow you to withdraw money whenever an emergency comes up.

Contributing to Roth IRA, where you can withdraw funds anytime without paying taxes, can work well. You won’t need to pay any penalties to withdraw medical expenses funds. This alternative saves you from getting an emergency loan whenever the unexpected happens.

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