The future can never be predicted. Of course, later there will be unexpected expenses for each individual. Whether for school expenses, medical treatment, or other incidents. For this reason, there is such a thing as an emergency fund that you can prepare for these sudden needs. This time, we will discuss what is called this emergency fund. An emergency fund is a reserve savings that is collected for future emergencies and urgency. You can set aside this emergency fund from your monthly expenses. For more details about this emergency fund, you can understand it through the article below. Before that, don't forget to follow the GIC Instagram account for a quick summary of our article!

Emergency Fund Explained

An emergency fund is money in a bank account set aside for unplanned expenses , such as medical bills or car or home repairs. An Emergency Fund can also help you cope with loss of income, due to job loss or prolonged illness. Using the funds allocated for unexpected bills can reduce the need and costs associated with high-interest credit cards or personal loans to pay them off. The emergency fund itself is usually a separate savings or bank account that is used to cover or offset expenses from unforeseen situations. It should not be considered a nest egg or counted as part of a long-term savings plan for college, a new car, or a vacation. Instead, these funds serve as a safety net, only to be tapped in case of an emergency.

How to Calculate Emergency Funds

An emergency fund should cover expenses for three to six months, but saving that amount takes time. To help you get started, start with small goals, such as saving $5 per day. Then work your way up to a backup to cover the cost of a few months. Your savings goals will depend on your income and expenses. Focus on having enough money to cover expenses, not replacing your entire income. Single breadwinners, business owners, or those with variable incomes should target expenses for nine to 12 months in the Emergency Fund.

The right amount for you depends on your financial circumstances, but a good rule of thumb is to have enough money to cover the cost of living for three to six months. (You may need more if you're freelancing or working seasonally, for example, or if your job is difficult to replace.) If you lose your job, you can use the money to pay for necessities while you look for a new job, or the funds can supplement your unemployment benefits. Start small, Weston says, but get started.

Having even $500 saved can get you out of a lot of financial scratches. Get rid of something now, and build your fund over time.

While the size of your Emergency Fund will vary depending on your lifestyle, monthly expenses, income, and dependents, the rule of thumb is to set aside at least three to six months of expenses. This amount may seem daunting at first, but the idea is to set aside a little money every week or two to achieve that goal. You may also want to consider adjusting the amount based on your billing obligations, family needs, job stability, or other factors.

Emergency Fund Function

What can an emergency fund add to your life? Peace of mind and security. No matter what your salary is, everyone can benefit from having savings to meet unexpected expenses without the need for upheavals in their lives and finances. This is the only reason why it is necessary to set up this financial tool. From a practical standpoint, an adequate Emergency Fund can stop you from going into debt and, more importantly, do so at a high interest rate. Imagine your car breaks down and you don't have any Emergency Fund or savings. How will you pay for repairs? By financing it, you will pay more for it and give yourself a new payment obligation every month. You don't have to postpone your savings plan every time something unexpected comes up and then start all over again. Even if you have automated your savings system, as explained below, it will not be a hassle. Where to start?   When it comes to building your Emergency Fund, the first two questions that come to your mind are how much you need and how to raise that money. An emergency fund has the main function of calming your mind in the face of a crisis, in contrast to when you don't have any investment to help mitigate the impact of a sudden emergency. This means that an emergency plan can serve as a stress reduction agent. Not having an Emergency Fund means that you will usually need help or an external loan whenever you are experiencing financial difficulties.

Other functions of having an emergency savings fund include:

  1. Protection of other investment objectives: With an emergency fund in place, there is no need to look for liquidation of other investments targeted for a specific purpose you are building. You can read more about this in the Depth Code and how it affects your investment journey. You can also access your Emergency Fund anytime there is an emergency that requires funds.
  2. Financial discipline: Saving money to hedge against life risks can help build your financial discipline and help reduce reckless expenses drastically.
  3. Low financial burden: With an emergency fund, you can avoid borrowing and put yourself in further trouble when there is a crisis.

Tips for Saving for an Emergency Fund

There are tips that you can apply if you want to save for the emergency fund. Having an Emergency Fund helps you get through rainy days and gives you peace of mind knowing that you can weather any storm that comes your way. Here are the steps to build your emergency fund.
Create a budget Like anything, start by creating a budget. This helps you better manage your money and find places where you can save. Start by recording your monthly income and all of your monthly expenses. Be as detailed as possible. Then, categorize your expenses according to your needs and wants. Set how much you can spend per category and once you've decided on the number, lock it in. Commit and see everything every month. Set a monthly savings goal This is the amount of money you want to work on each month and commit to adding to your emergency fund. If you are a single-income family or if your current income is sufficient, it can be difficult to take a portion of your salary each month and lock it in. This is why budgeting is key. Large amounts each month can be difficult but smaller amounts are possible. Keep working and be consistent. You'll get there before you know it. Adjusting a budget Many things can change within a few months. You can get coveted promotions, take freelance jobs, find you spend less than what you budgeted for, etc. Make it a point to review your budget frequently and see what works and what doesn't work for you. If there's a way for you to save more so you can reach your emergency fund goal faster, go for it!
After knowing about this emergency fund, as well as its functions and tips, you can still find out about this fund in other media. Also make sure to start saving for this emergency fund so that you can be guaranteed a better future. Thus the discussion from GICTrade regarding the explanation "Let's Find Out How to Prepare Emergency Fund Savings!". You can also find out other information about investment, savings, and other finances, such as "Small Capital Beginner Investments that You Must Try!" only in the GIC Journal. Register now to be able to trade on GIC and get more information from GIC! GIC