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What is an Emergency Fund

Updated: Mar 3, 2022

When it comes to financial planning one key component is to have an emergency fund. This differs from a rainy-day fund which is for unforeseen expenses that come up through the year. For example, the dishwasher or hot water heater breaks, or you need a gutter repair.

The purpose of the emergency fund is to have money saved for expenses in the event you cannot work. Typically, this occurs with a job loss or a health-related issue.

Most financial experts agree that having 3-6 months of disposable income is required. The premise is based on the time it takes an average person to find new employment which varies based on the individual. For example, people working in the service industry during the Coronavirus pandemic suffered many months without employment.

For medical needs, this much less predictable so you should stick with the higher end of the goal to be better prepared.

When deciding how much is money required, it comes down to needs versus wants. For example, many leisure activities may need to be put on hold such as hobbies, dining out and the health club membership. This may include scaling back on the cell phone, music and digital streaming services and groceries.

It is important to have an emergency fund especially before moving out on your own. If this money is not available and you run into an unfortunate event, then money will need to come from somewhere. This where people often get into trouble with credit card debt. Regardless of the situation, set up a plan to set aside money each month into a savings account and work to pay of any credit cards off in tandem until you reach your goal.

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