In our previous article Why Investment can ruin you before reading this article, we have discussed various aspects of personal finance such as knowing your expenses, taking insurance, and reducing the debt. If you have not read the previous article, I request you to kindly spend some time and check that article before reading this one. It will be a great help to you. So, let’s start with a question first. What would you do if you lost your job tomorrow or you met with a medical emergency in your family? Well, you may criticize me or can ignore this question by saying what a rubbish question is this? I’m not going to lose my job nor am I going to have a medical emergency as all my family members are well and healthy. Well, my dear friends, I’m sorry to say that the future is uncertain and we have to always be ready to accept the truth of uncertainty in life.
Now since we have accepted the truth, the next possible question which arises in our mind is – are we ready to face such a situation? How prepared are we in handling such bad situations in our life? That’s where you feel a need for an emergency fund. We all must have an emergency fund to deal with such uncertain situations. And as the name suggests ‘Emergency Fund’ is the amount of money allocated for such types of emergencies arising in our life. This fund can’t be used to buy expensive clothes or luxuries no matter how much you are lured by your mind. We have seen so many people in our life who don’t have an emergency fund and when they meet with such an emergency. They find themselves in trouble, ask for money from relatives, take loans, sell their land, house, or jewelry, etc. It is my personal view that asking for money from relatives is the worst case as you have to compromise with your dignity and respect.
“When wealth is lost, nothing is lost; when health is lost, something is lost; when a character is lost, all is lost.” – Billy Graham
When you read the above quote, again and again, one thing you will notice is that character, respect, and dignity of a man are everything for him/her. Health and wealth are also important but you can always gain these with hard work but if the character is ruined that’s like broken glass that can’t be fixed no matter how hard you try. Think of the moment you ask for money from others and they also refuse to give. Are you Ok with the moment? If you are OK then I will ask you to stop reading this article further with due respect.
So, till now we have understood how important is for the emergency fund to live a happy and tension-free life with dignity and respect. Now, we will ask another question which is how much we must keep in an emergency fund?
The answer to this question is very subjective and it differs from person to person. But for the general rule what is suggested is that you must at least have 6 months of your expenses or income in the fund.
For example- suppose I earn $5,000 per month and my expenses are $3,000 per month. Then in emergency fund I must have either $5,000*6 = $30,000 or $3,000*6 = $18,000. But personally, I’ll prefer 6 months of income in my fund rather than expenses. Well, you can choose the 6 months of expenses, there is nothing good or bad in it.
Once you have gradually achieved the target then don’t use this fund in normal purchasing of things like – cars, bikes, etc. You should forget this money and only remember it in time of emergency. Also, If you take some money out of it then fill the fund as early as possible. For example, If you have a $30,000 fund and you took $10,000 from it then your first priority should be to save $10,000 and put in this fund to make it $30,000 again. One more thing you should keep in mind is – this fund changes according to your income or expenses. So, if either your income or expenses go on increasing, your emergency fund will also increase in the same proportion.
Finally, I’ll stop here and ask you to work on this goal as soon as possible and once you have achieved the goal. You can share your experience with our email on the contact us page. Visit us and share the article with as many people you know who are in need of financial knowledge to get the happiness of financial nirvana. Till then May God bless us all!
