The emergency fund idea is grossly misunderstood
"I am in an income bracket where I do not really need to have an emergency fund." A wealthy individual shared this with me once, when I curiously asked about his approach to emergency funds. However, it's universally known that funds kept aside for unforeseen situations constitute an emergency fund. This isn't a novel idea. But the perspectives people hold towards it, like the affluent individual mentioned, prompted me to pen down my thoughts.
It's undeniable: Every single one of us will face emergencies. And just to be clear - wealth doesn't grant immunity from life's unexpected challenges! Thus, the importance of an emergency fund is universal, regardless of financial standing. Delving deeper into the concept of an emergency fund: It's essentially savings set aside for unplanned expenditures – whether it's for personal use, family needs, extended relations, or aiding a friend in crisis.
The emphasis here is on the word “unexpected". And because it is unexpected, there are two more words that apply here: “safe" and very "liquid". In effect, this is sacred money, which needs to be in a very safe place so that as and when you need it, it’s available to you at short notice.
Makes sense? Well, if you get this, everything else about emergency monies is straight forward. One question that needs to be answered is how much money you need to set aside. This is going to be very personal for you, and only you will know how much money to set aside.
From what I have seen and learnt over the years, a fund comprising one-to-two years worth of income is a good way to start. For some of you it may be less, for others more. Now, I am sure that’s a lot of money for you to set aside.
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