What is an Emergency Fund and what is it used for?
It is used of course for an emergency. But what is an emergency, for example, the car breaks down with high costs to repair it, the stove or refrigerator breaks down for good and needs replaced, someone in the family gets sick or is hospitalized and you have to pay a large deductible or worst some of the expenses are not covered or you lose your job. It is used to pay for an expense/emergency that is outside your normal budget. This is what an emergency fund is and what its purpose is.
Typically you will hear three to six months of living expenses is the amount to have set aside. However, it depends on your situation because everyone has different circumstances. If your job is more secure or your field or expertise is highly needed in the job market, you maybe able to have only three months. If your job is not as secure, you may need nine months to a year. It is what you are most comfortable with. Everyone is going to have expenses out of the norm that can break your budget. This why having the emergency fund helps keep your budget on track and keeps you from going into debt.
Anytime you have an emergency expense that your budget cannot handle, use your emergency fund. Before you take the money out though, make sure there is not another way to pay for the expense. If there is not, take the money out of your emergency fund. At the same time, begin now to reimburse yourself. Plan on how much you can put back in and how long it will take to reimburse your emergency fund. If you are using the money because of a job loss, obviously you can’t reimburse yourself until you have found another job. But when you do, plan to reimburse your emergency fund.
Where do you put your emergency fund?
Wherever you put it, you have to be able to get access to it when your need it fast. There are several options but do not put it in a savings account because they very little interest on your money. A money market mutual fund (liquid fund), high interest savings account or e-fixed deposit is a good place to put your emergency fund. They pay a good rate of return on your money and are considered safe.