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You probably heard your Dad lecture you about keeping some money aside in case of an emergency. Listen to your old man, he means well. Emergencies won’t give you a call before arriving; they are by nature, unpredictable and random.

An unanticipated job loss, a car wreck, or a surprise medical bill can disrupt your family’s financial stability. You cannot simply avoid an emergency. However, if you are farsighted and smart enough, you will know that an emergency fund can go a long way and might help you restore your financial stability in no time.

An emergency fund is basically money set aside to compensate twists and turns of life. Emergency funds will act as a safety blanket, making sure that your financial position stays protected without having to go knee-deep in debt.

It is also wise to identify the correct amount of money you must save for your emergency fund so that you don’t end up oversupplying the fund with money. Here are some tips that will help you:

How much should you save?

Rule of Thumb for saving money

Experts recommend setting aside at least three to six months of your income. Apart from considering their recommendations, you should keep in mind that the size of your fund will differ depending on your situation such as lifestyle, family size, monthly expenses, job stability, student debt, etc.

Establish a Rich Saving Habits

The amount can appear quite discouraging; however, if you chip in a small but consistent amount every month, you might be able to achieve your target.

When it comes to saving, something is better than nothing. Also, you will require a great deal of discipline and commitment in order to save money. Apart from this, saving smaller chunks on a regular basis is found to be more effective than saving larger amounts once in a while.

Some More Useful Tips

  1. Make and stick to a budget : When making a budget, list down all your monthly incomes and expenditures. When you subtract your expenses from your income, you’ll get your monthly savings. Also, sketch out the ways you can spend your money in an order that reduces costs, thus increasing your savings.
  2. Draft your monthly savings goal : Once you have identified how much money you are left with after paying off all your bills, start developing your monthly savings plan; This is how much money you can afford to set aside for your emergency fund.
  3. Remodel : If you get a promotion or won a lottery, you might be able to save even more. So, you have to adjust your savings plan accordingly.

Where should you place your money?

I would recommend you to place your emergency fund in a high-yield savings account or money market. This is to make sure that the investment is safe and risk-free while keeping the liquidity high so that you can access the money very quickly when needed.

Overfunding – A Problem

Overfunding is a very common problem when deciding on how much to save. There would be literally a ton of your money sitting idle in a bank account, and you would still be struggling to accomplish your other financial goals.

You can better utilize the extra money. You could be paying off your debt or saving for your early retirement, but instead, you over-padded your emergency fund. It is not wise to save more than required.

Bottom-line

People will tell you that the larger the size of your emergency fund, the better. However, considering the risks associated with overfunding, you might end up doing more harm than good.

It is safer to follow the tips mentioned in the article so that your emergency fund works in sync with your financial plans.

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