Savings that can never come to your rescue during an emergency financial crisis is as good as useless. But if you are well-equipped with cash set aside for unexpected tough times then you have a healthy financial plan in place.
The problem is how much is enough to determine the money for an emergency situation that could be otherwise used wisely for other purposes. Many times, people have a tendency to ignore the debts resulting due to borrowing money whenever there is an emergency.
Too Much Is Too Unnecessary
Most people may become over-cautious and fear to underfund emergency savings so they start investing a lot of time and money. However, overfunding savings that just sit idle without any returns or preventing you from spending it for other needs can hurt you.
The magnitude of the emergency situation decides the worthiness of your savings towards it. For example, medical emergencies are very common but the hospital bills are something nobody can predict and it depends on the ailment the person is suffering and the associated cost to cure it.
Your Money Is Draining
Emergency funds make sense only based on the accessibility. The best option and place to deposit your money is in a savings account at your bank. Until the situation demands you extract the money your money will be earning interest. Regardless of how much you have in an emergency fund, you are still losing money if it is more than your need.
Missing Other Financial Goals
The frequency of emergencies is too less to attract more funds for the cause. Having too much money tied up in an emergency fund can prevent you from missing out on other important financial opportunities. It can be either a contribution to paying off debt, retirement or a down payment for a loan.
Utilizing your money to pay for things that need it more than something that is uncertain is a waste of time.
What Is The Correct Amount?
Determining a sufficient amount of money for an emergency fund is very crucial to stop unwanted attention towards a single agenda. You should consider the following before planning the diversion of funds:
- A comfortable amount to be put away
- How much you can stretch to safeguard the fund
- Your current financial status and income
- Your financial commitments and responsibilities
Timeline To Build An Emergency Fund
A timeline of somewhere between three to six months of expenses is recommended for your emergency fund. A few hundred dollars as a beginner is a great way to start, and maybe a year or more of your income.
In addition, make sure to remember the specifics of your present situation such as whether you own or rent a home, family size, the number of vehicles you own or lease, and job stability. The current pandemic can disrupt your timelines but that is just a temporary issue and getting into the habit of saving for an emergency fund will do the trick.
How To Get Things Started
It takes a lot of effort and patience to tame your mind and stick to a plan especially when your priorities are changing frequently. For example, the coronavirus pandemic has changed the mindset of people who are more concerned about protecting the funds rather than categorizing it. But the problem with emergencies is that they never have a definite warning and appear out of the blue.
Approaching an emergency fund something on the lines of insurance can bring you on track and protect you just in case things go wrong. The emergency fund requires a sizable accumulation of money in your account in a short time period without actually investing more time like an insurance plan.
Is Overfunding Your Emergency Savings Bad?
Overfunding will prevent you from borrowing money from a relative or family member for clearing debts or any personal needs. What are the chances of overfunding when the emergency fund itself is a task cut-out? Well, you can always rely on an external emergency fund that shall take care of your daily expenses with no interest, and hence the chances of overfunding or setting up an emergency fund become very much possible.
Emergency Fund Should Support Your Financial Plan
The emergency fund has found more prominence during the lockdown as the instances of cash crunch have never been experienced before. While it is a different form of savings the amount required to create an emergency fund can be challenging. Trying to achieve the goal by scarifying the bottom line of expenses can impact your overall financial health including the debt baggage that you might already have.
In short, work towards an emergency fund that aligns with your financial plan and avoid going overboard to make up your savings.