An emergency fund is an accumulated pool of money that you can use towards any unforeseen contingencies that may arise. There are sudden large spends which can be catered to via adequate insurance like medical expenses, car damage and theft. However, there are other emergencies like job loss or sudden large sum of money that your family member needs which you cannot cater for other than from your savings.

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Unless you have systematically put aside an amount earmarked for such situations, you will have to dive into your long-term savings, which can upset your financial goals.

As a rule of thumb, advisors suggest keeping at least six months’ worth of expenses aside as emergency fund. This amount can be kept in a liquid fund. Some even prefer to move it to a separate savings bank account so that it is not accessible for daily use.

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