The power of emergency funds: Why and how to build one (Part-1)

A small amount of money can make a big difference in the event of an unexpected expense. In this article, we will explore further about it.

An emergency fund is a savings account that you set aside specifically for unexpected expenses. It can help you cover the cost of things like job loss, medical bills, or car repairs without having to go into debt. 

Why is an emergency fund important? 

There are many reasons why it is important to have an emergency fund. Here are a few: 

Unexpected expenses happen to everyone. Even if you have a good job and health insurance, there is always the possibility of an unexpected expense, such as a job loss, medical bill, or car repair. An emergency fund can help you avoid going into debt to cover these expenses. 

Debt can be expensive. If you have to go into debt to cover an unexpected expense, you will likely have to pay higher interest on the loan for an emergency fund. This can add up over time and make it more difficult to pay off the debt. 

An emergency fund can give you peace of mind. Knowing that you have an emergency fund to fall back on can give you peace of mind and help you sleep better at night. Remember, how the Wuhan virus (Covid-19) has had a significant impact on the financial positions of people around the world. Many people have lost their jobs and experienced income shocks. Additionally, the pandemic has led to increased expenses for many people, such as healthcare costs, childcare costs, and the cost of food. And for the same reason, it is very important to have an emergency fund. 

How much money should you have in your emergency fund? 

The amount of money you need in your emergency fund depends on your individual circumstances. However, a good rule of thumb is to have enough money to cover six to nine months of living expenses.  

An emergency fund is an essential part of any financial plan. It can help you cover the cost of unexpected expenses without having to go into debt. If you don't have an emergency fund, start building one today. Even a small amount of money can make a big difference in the event of an unexpected expense. 

This is the first part of our Emergency Funds series. Part 2 on the topic will be published soon.