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The purpose of an emergency fund is to provide for cash and bill payments in the event of an emergency. To deal with those dark days, having an emergency fund is a necessity. Think of it as a shock absorber for the bumps of life; one that'll keep you from adding to the load of debt you already carry.
This is a fund separate from your checking account. I also recommend it to be separate from your regular savings account. In order of liquidity, I recommend this to be the last resort for any spending and the first place for any surplus savings. This is only used for emergencies. This should not be held in risky investments. You’re not looking to make money on these funds, you’re looking for preservation of capital and money to be there when you need it.
I recommend that everyone have an emergency fund. Your emergency funds should be held in cash/liquid funds. While some call having one to two months' wages in reserve ideal, most financial experts recommend that people maintain an emergency cash reserve large enough to cover three to six months' worth of household expenses. I recommend seven to twelve months emergency cash liquid reserve. Your emergency fund should be liquid and invested in something with no or minimal fees to liquidate to cash upon call. That's a great idea, but it also requires some effort to achieve. The first step in the process is to figure out how much you spend each month.
Here we look at how much you'll need to save for your emergency fund and how you can get started,
What Will You Need?
Consumer expenditure statistics from the U.S. Department of Labor indicate that the average annual expenditure per consumer unit, which is similar to a household, is $63,036 as of 2019 (Source: U.S. Bureau of Labor Statistics- the most recent year for which data is available).
If you don’t currently have an emergency fund, I advise you to write down your monthly expenses to get an idea of what one month worth of savings are required. Make a detailed list of your average monthly expenses. This will also allow you to see where you can spend less and save more. This list should cover the basics, such as rent/mortgage, utilities, groceries, phone/cable, car and insurance payments, etc. itemize and record any/all income and expenditures. Record all spending. Try to rid yourself of unnecessary bills that you can avoid. Keep track of all savings and investments. Once you identify how much your average monthly bills are, you multiply this number by the number of months you want to have in your emergency fund.
Total Monthly Expenses = $3,000
Desired Emergency Fund (6 months) = $18,000
If you don’t have enough to fully find your emergency fund, make regular contributions until you reach your desired goal. Every paycheck or financial inflow, you should add to your emergency fund until it is fully funded.
To recap: An emergency fund is an essential element in your overall financial portfolio. It is a liquid cash reserve to be available for any emergencies and expenses.
As you begin to become detailed with your finances, you can begin the journey to achieving your overall financial goals. Follow for next steps on your journey to financial freedom and it cost you nothing. I’m sharing with you for free. If anyone is interested in a personal and confidential conversation or interested in professional advice, feel free to contact me for your personalized financial and investment plan. My attempt is to break things down to simplicity to be able to help others on all income levels.
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