Ultimate Guide To Emergency Fund Including How To Get 8%+ Risk Free Returns

Why have an emergency fund? The basic purpose of an emergency fund as the name implies is to be available for use during unforeseen circumstances to avoid going into debt. All debt is not necessarily bad.

In fact debt can be used strategically to accelerate Financial Freedom Countdown.

Falling into unplanned debt usually means borrowing money at the last minute out of desperation which results in unfavorable lending terms.

However, we need to ensure that lack of planning for an emergency does not cause us to spiral into debt.

What should an emergency fund cover? Now that we have understood the perils of not having an emergency fund; let us dive into when to use an emergency fund.

Some personal finance blogs consider the following scenarios where the emergency fund can be used – Roof repair – Car breakdown – An unplanned trip to visit a relative in poor health – Major health expense – Emergency pet care

While we may not agree with everything he says, there are nine decades of wisdom buried in Warren Buffett’s quotes.

The challenge with considering these as emergencies and using your emergency fund is that these can occur on a fairly regular basis and you would then be depleting your emergency fund frequently.

What constitutes a real emergency? As we covered in our post on leveraging Human Capital; when you are working, your job provides a steady stream of income which can be used for various expenses including saving and investing.

How much emergency fund is needed? The size of your emergency fund depends on your job security. Your job provides a monthly cash flow. When you are no longer employed you need to cover your regular expenses which would directly influence the size of your emergency fund

Where not to keep your emergency fund

An emergency fund should always be available at a moment’s notice in case of an emergency. The worst thing that you can do is to plan and save for an emergency and then have it lose value since you invested in a risky asset class for an additional yield.

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