An emergency can take the form of a vehicular accident, sickness, job loss, car damage or urgent need for home repairs. An emergency also usually entails money since a medication, living expenses and vehicle repairs all require payments. Therefore, aside from the fact that an emergency can be emotionally stressful, it could also take a toll on your finances as well.
If you are financially ready for an emergency, you’d be confident in facing life’s uncertainties knowing that you have the financial cushion to tide you over. Otherwise, it would be very stressful to deal with a situation when you don’t have the funds to see you through.
This is the reason why finance experts advocate having an emergency fund to help you deal with life’s surprises. This fund is not the same as your savings and should be allocated separately when you do your budget. Usually, having an emergency fund of at least six months worth of monthly expenses would be sufficient, but if you can throw in the extra dollars to the fund, that would be better.
It is also helpful to determine situation where in the emergency fund should be used. A new leather jacket is certainly not an emergency, but having your roof repaired can be one. Taking a grand vacation with your friends is not an emergency, but buying your medications is one. Therefore, it is good to have another savings set up specifically for your wants to prevent you from using the emergency fund unnecessarily.
Lastly, you need to consider where you want to keep the emergency fund. Ideally, the money should always be accessible, so saving it into your bank account would be a good idea. The money may grow very slowly but since you are not investing the money for it to grow aggressively, you can be confident knowing that your emergency fund is parked somewhere safe and accessible.