We can’t predict the future so it’s imperative that we have a readily available money for unexpected expenses. Otherwise we could end up taking high interest loans and credit card debts or sell investment we don’t want to sell just to fund these unplanned expenses. There are varying degrees of financial emergencies such as a breakdown of your car or appliance or worse a sudden lose of job or income stream. These are not part of your regular budgeted expenses and could set you back from your financial goal.
So how much do you need to set aside as your emergency fund? Depending on where you are and how easy to get a job if you lose it, I would recommend to come up with an emergency fund equivalent to your total monthly expense times the number of months it will take you to find another job. So if your monthly expense is $5000 and you expect to get a job within 6 months then you need an emergency fund of $30,000 dollars ($5000 times 6).
This emergency fund should be accessible and ideally saved in the bank as cash or checking account so you can withdraw from it easily when needed. This should not be in any other form such as investment or physical items such as jewelries or saleable items. You don’t want to sell investments or any items for emergencies because you are likely to lose its fair value if you are in dire need to sell.
It would be great if you don’t have to use your emergency fund but in case you do, make sure that you replenish it as quickly as you can when you are back to your normal situation. Regularly review your emergency fund and make sure to maintain it at the level that is sufficient for your needs in case of financial emergencies. It may also be a good idea to put more into it but I think you should not go over too much in adding more money once you are at the level that you have calculated. The extra money can then be put in investments which can give you returns.
So before putting any money in investment, make sure you pay off your high interest rate debts and build you emergency fund first. After that, go through all my notes here and gain all the financial knowledge you need and then start investing.
