Whether you’re fresh out of college working on your first job or a seasoned professional with decades of experience under your belt, no one is immune to financial emergencies. This is why financial experts have been recommending and even ardently urging consumers to have an emergency fund.
Conventional wisdom tells us to save up 3 up to 6 months’ worth of expenses that are liquid and easy to access. The money comes handy for unexpected emergencies. If you suddenly get laid off, for example, a sufficient emergency fund can save the day. At its simplest, the recommendation makes perfect sense. But looking at other factors such as inflation and interest rate, is it really that necessary?
To answer the question, it helps to first understand what constitutes a financial emergency. Financial emergencies come in many forms and it’s not a question of if it will happen but when it will hit. Some of the common emergencies include medical expenses at the top of list, vehicle expenses such as repair, home or housing emergencies, education, job loss as mentioned earlier and other unexpected expected expenses such as legal costs, taxes, pet-related and even funeral costs.
No matter your age or income, these aforementioned emergencies can unexpectedly knock on your door at any moment. Statistics say that 34% of people experience these kinds of emergencies and you could be one of them. Unless you have an emergency fund, you may find yourself in a devastatingly difficult financial situation. If you don’t ever want to get stuck in a financial rut because of unexpected expenses then having an emergency fund is imperative.
So yes, having an emergency fund is necessary no matter your age, job or lot in life. At the end of the day, it boils down to the two questions. How much emergency fund you need and where should you place your emergency fund?
Following the common convention of saving 3 to 6 months’ worth of living expenses may simplify things but it doesn’t always perfectly fit every situation. Since needs vary from person to person and family to family, it pays to calculate potential unexpected expenses based on your situation.
Start off with your medical expenses. This is where medical insurance come handy. Taking that into consideration, compute an estimate of money you need to cover for other medical expenses such as surgery, medications, therapy, etc. You’ll also need to have enough money for your car repair and maintenance especially if you have an old model. If you have high interest debts such as credit cards, it’s also time to start paying them off. With less debt, you’ll be more prepared to weather emergencies.
Considering all important factors and unexpected expenses that may affect your finances, you should be able to compute a rough estimate of the financial emergency fund you’ll need just in case.
The next important question to carefully consider is where to put the money. Again, conventional wisdom tells us to place the money in a liquid and highly accessible savings account, which again makes perfect sense.
If a financial emergency hits, the money is just right there. But there’s just one problem. Savings accounts are very stingy when it comes to their interest rates. With inflation to consider, you’ll end up with less money that you originally saved. Rather than stash it on a savings account, you might consider checking into other conservative investments with higher interest rates such as bonds. Wherever you put the money, the bottom line in any case is to always have a fund ready for emergencies.