An emergency fund is a fund that can be used for small emergencies. Medicines, something that you need for replacing, or even in joblessness.
The emergency fund will help you KEEP OUT OF DEBT and will PROTECT YOUR INVESTMENT.
One time I was jobless, I was jobless for 7 months! I did not have any cash flow, all that was left was my emergency fund.
While I was searching for a job, I had to spend on jeepney fares, snacks, meals and some little needs. That was all I had!
What was amazing is that my emergency fund lasted for 7 months and fortunately, on the 7th month I got a job, so it was time for me to build the emergency fund again.
What did I do with my emergency fund? I had to pay jeepney fares looking for a job. When I was hungry I would by bread, about a piece or 2. If I had free time, I would go to The Feast (Catholic Community), I pay my fare for that and even use my emergency fund to tithe!
On that time too, my PC monitor broke! I was thinking if I should replace it or not since I did not have a job but I realized that it was a need. I was job searching online so I had to buy a 16 inch monitor which cost me around 3000 PHP and that was from my emergency fund.
For 7 months, I was praying that I would not spend something big and so It was granted. For 7 months, I spending just for my fare, snacks, meals and all the petty expenses.
That is the emergency fund. Only use this fund if it is truly an emergency, not just because a party is coming up and your are short of funds then the emergency fund would be used. That is wrong.
Last December 2012, I had chicken pox, I was already employed back then but if I would be absent for 2 weeks, that would mean no pay! True, I did not have any pay. So how did I move on? With my emergency fund!
My medicine for chicken pox was from may emergency fund. If I did not have any emergency fund, I could have withdrawn my investments, in result, I stop its growth.
Worst, I could have owed money, interest after interest and I would not be sure if I could pay it off.
This is how important an emergency fund is and when building your financial foundation, do not forget the emergency fund. How much emergency fund is needed? That would be 3 or 6 months worth of your pay.
If you receive 20k a month, then your emergency fund should be 60k to 180k. Emergency funds only cover for small emergencies. If there is a medical emergency which involves major operations, then healthcare kicks in.
Fire, flood, car breaks down - these should be covered by fire insurance and car insurance, not the emergency fund.
Build your emergency fund right!
Happy investing!
Cheers!
Picture is not mine. Picture is from http://modernsurvivalonline.com/wp-content/uploads/2011/10/emergency-fund-300x300.jpg
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