Save and build up a cash reserve equal to around 3X~6X of your total monthly household expenses. The purpose of this cash reserve is to cover for unforeseen emergency needs that may come your way. This emergency fund is like a safety-net or a spare tire to protect you and your household from any fall or flat tire in your financial journey thru life. Just like the spare tire, this fund has to be liquid and easily accessible so that you can easily respond to the emergency financial need. Another important purpose of an emergency fund in personal finance management is to prevent you from resorting to debts/loans during a financial emergency. So this will prevent you from acquiring new monthly expenses thru the required interest payments on the debt (See Step 3: Eliminate Bad Debt).
Some examples of financial emergencies:
-> Unforeseen household/car repairs
-> Job interruption
-> Medical emergency
Having an emergency fund is a requirement to be able to develop a well-rounded financial plan.
Create an Emergency Fund.
What is an Emergency Fund? (From Investopedia.com)
No comments:
Post a Comment