Emergency Fund is a financial safety net to provide cash in case of emergencies, like job loss or medical bills, without having to go into debt.
An emergency fund serves as a readily available source of cash to handle unanticipated expenses.
Purpose of having an Emergency Fund
The purpose of having an emergency fund is to provide a financial safety net for unexpected expenses or financial emergencies.
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This fund can be used to cover expenses such as medical bills, car repairs, job loss, or other unexpected financial situations.
It can help individuals to be better prepared for unexpected situations and to avoid going into debt to pay for these expenses.
Additionally, having an emergency fund can also provide peace of mind & financial security, knowing that you have a cushion to fall back on in case of an emergency.
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How to create an emergency fund?
Creating an emergency fund can be done by following these steps:
- Determine the amount of money you want to set aside for your emergency fund. A general rule of thumb is to aim for six months' worth of living expenses.
- Open a savings account specifically for your emergency fund. This account should be separate from your regular savings accounts, to avoid the temptation to use the money for non-emergency expenses. Also you can invest highly liquid investment such as Liquid Fund, Short Term Fund.
- Make regular contributions to your emergency fund. Automate the process by setting up a direct deposit or automatic transfer from your account to your emergency fund savings account or your Liquid Fund Scheme.
- Avoid withdrawing money from your emergency fund unless it is a true emergency. If you do need to withdraw money, make sure to replenish the funds as soon as possible.
- Keep in mind that it will take time to build up your emergency fund, but it's worth the effort to have a financial safety net in place to help you get through unexpected financial situations.
Avoid using the money in your emergency fund for non-emergency expenses. This will help you to keep the fund intact for when you really need it.
In conclusion, an emergency fund is a crucial part of any financial plan. It serves as a financial safety net that provides cash for unexpected expenses or financial emergencies.
By having an emergency fund in place, you can be better prepared for unexpected financial situations and avoid going into debt.