There’s no doubt that emergency funds are very important always. One can face many problems without a proper emergency fund, such as forced to take high-interest debt, sell investments in low value, pay penalty taxes on early retirement fund distribution etc.
Here are some tips to guide you through for having the perfect emergency fund as per your needs.
Emergency Fund Offers Opportunities:
Emergency fund defends you as well as gives you the opportunity to take calculated risks in achieving your goals. You’ll be in a safer position while starting a new business, or to go far away in search of a better job with the support of emergency fund. According to several records, emergency funds support hugely to stretch long-term strategic plans in order to make huge wealth over time.
Understand the Opportunity Cost:
You must always consider the opportunity cost of holding huge amount money in low yielding market. Even dollar sits in an emergency fund with bank checking and savings account rates going higher. If you hold in cash rigidly, then it’ll become incrementally harder to achieve your goals. It’s positively losing money as the emergency fund won’t outpace inflation most probably. You’ll even miss the opportunity cost on tax savings if you prioritize emergency funding over tax-advantaged accounts like IRA or 401(k). Always remember that emergency fund is an insurance type and you must balance between the opportunity cost of emergency fund and your protection for emergency.
Decide a Proper Amount:
It’s highly necessary to determine a budget, considering thoroughly your own expenses. Financial planners mostly recommend an emergency fund of 2-6 months of expenses. But all have their individual requirements and limitations. The fund depends on one’s income, marketing skills etc. various things. You should evaluate different situations before fixing the fund amount. And obviously, these scenarios vary from person to person.
Customize Own Emergency Fund:
You must consider your personal circumstance, such as the amount of responsibilities and dependents you’ve as any change of these circumstances will have their own consequences. For example, a family with no kids, a family with kids, or families with siblings, parents or grandparents – all have their individual needs and should customize their emergency fund’s size according to their own budget, requirements, and applications.
A right emergency fund will always be your true friend to have your back. It’ll allow you to chase your passion and goal with more confidence and security for sure.