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Emergency Fund: Your Financial Safety Net

“Benjamin Franklin once said, ‘By failing to prepare, you are preparing to fail.’ This wisdom applies to our finances as well. Building an emergency fund is about preparing for the unexpected, ensuring we can weather any storm without jeopardizing our financial health.”

It’s impossible to be fully prepared for a major financial setback but having an emergency fund to fall back on will help you recover faster. An emergency fund is basically a cash reserve set aside to tackle life’s unexpected twists and turns. It serves as a financial shield, providing a secure safety net to fall back on in the event of unforeseen circumstances always there to rescue you when life’s unexpected and unplanned surprises knock your door.

Suppose there is an medical emergency in your family and you don’t have money. What will happen? Your stress levels will rise potentially causing anxiety and other health problems. Having no option left you will have to rely on high interest debts. Now, picture having an emergency fund in place instead. Having this safety net you will be shielded from falling into a debt trap , ultimately bolstering your financial resilience and peace of mind.

On considering emergency fund, the first and foremost question that arises in our minds is how much amount should we actually save? What is the appropriate amount for creating an emergency fund?

The general rule of thumb says- save 3-6 months’ worth of living expenses. However, this can vary depending on the needs and preferences of people. For example if a persons job is very unstable he might want larger fund. Similarly joint families often require a substantial amount of emergency fund.

Where to Keep Your Emergency Fund?

There are various options where you can actually invest and start saving for such unprecedent situations

High-yield savings accounts: One of the most common options while creating an emergency fund is high yield savings account. It offers better interest rates than regular savings accounts.
Money market accounts: Similar to high-yield savings accounts are Money market accounts. However, it provides slightly higher interest rates and limited check-writing privileges.
Short-term CDs: Another option while creating an emergency fund are Certificates of deposit (CDs). They differ from other options because they offer a certain rate of return only if you keep money in the account for a certain period of time.

Debunking Emergency Fund Myths

There are many misconceptions about emergency funds that can hinder people from building one. Let’s dispel some common myths:

Myth : I don’t need an emergency fund because I have good insurance.

Reality: It is a common belief that insurance policies cover everything. However it is not true. Deductibles, copays can still leave you with significant out-of-pocket expenses.

Myth : I’ll use credit cards for emergencies.

Reality: Credit cards are a costly solution for emergencies. High-interest rates can quickly spiral into debt. An emergency fund prevents this.

Myth : I’m too young/old to start saving for an emergency fund.

Reality: Emergencies can knock your door anytime . so, its never too early or too late to start building an emergency fund.

Emergencies come unannounced yet they are irreversible truth of our lives. It can be as small as a flat tyre or as big as a medical emergency that can turn your world upside down. While we cannot predict the next emergency we face, we can definitely prepare for it. The best way to deal with such potential financial emergencies is to create an emergency fund. Such funds can actually turn a crisis into convenience.

~Written By- Ridhima Sehgal

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