Aside from saving money, having an emergency fund is one of the basics of building your finances.
Since it acts as a buffer for unplanned costs, you will not need to dip into your savings, or worse, take out a loan.
What is an emergency fund?
An emergency fund is money separate from your savings intended for uncertainties such as sudden job loss, accidents, an illness, and other unexpected expenses.
How much should the emergency fund be?
The general rule of thumb is that an emergency fund should be equivalent to three to six months of your pay or enough to cover your expenses for a short period of time but it could be more depending on you.
Don't worry, you can slowly build the amount by saving a certain portion of your salary for your emergency fund.
Where to keep the emergency fund?
Since an emergency fund is money meant for life's uncertainties, it should be liquid. Keep it in an easy to access bank account so that you can withdraw it once needed.
How to build and manage the emergency fund?
If you're just starting out, assess your cash flow and compute how much money can you commit to set aside monthly for your emergency fund. Once you reach your desired amount, decide where you want to keep your emergency fund.
In terms of managing your emergency fund, list down what constitutes as an emergency that will enable you to use the money. Examples include sudden job loss, accidents, and medical emergencies.
If you've used your emergency fund, work your way to rebuilding it by setting a goal and recovering lost costs either by putting in extra savings or adjusting your budget.
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