The recommended amount for long-term emergency reserves is three to six months' worth of spending. It's a significant amount of money, and accumulating it could even seem unachievable, which is why it is a long-term financial goal.
What Should We Know About Emergency Funds for Long Term Saving?
An emergency fund acts as a long-term saving plan for unforeseen expenses or during times of job loss. A health issue that keeps you from working or a natural disaster like an earthquake or flood might both be considered emergencies. Having emergency funds means ensuring you have enough money to go through any disaster. Everybody has various needs for an emergency fund, so you must set one up that is appropriate for you.
Keep reading to know more about the same.
What Is an Emergency Fund?
The phrase "emergency fund" refers to money set aside for use by individuals in times of adversity. The goal of an emergency fund is to improve financial stability by providing a safety net that may be utilised to cover unforeseen costs like a medical emergency or significant home repairs.
Cash and other assets with high liquidity tend to act as emergency fund assets. This lessens the need to deplete retirement savings or jeopardise your future security by using high-interest debt options like unsecured loans or credit cards.
What Are the Types of Emergency Funds?
1. Emergency Funds for the Long-TermThis is where you store money for significant crises, such as a significant natural disaster or an unexpected medical emergency. This money should be used in investments that offer a marginally better rate of return but may take a few days to liquidate.
2. Emergency Funds for Short-TermIn an emergency, you turn to this fund first. This fund should be immediately accessible. Further, short-term emergency funds should be sufficient until you have access to your emergency funds for the long term.
Why Is an Emergency Fund Important for a Long Term Saving Plan?
Emergency funds act as one of the best long-term savings plans. The COVID-19 outbreak made the need for emergency funds even more necessary. According to a YouGov survey for Forbes published in April 2021, the pandemic forced nearly 40% of those with emergency funds to use them, with 73.3% spending all of them and 29% using half or more.
Numerous people lost their money and job as the entire nation slipped into a virtual lockdown. The cost of their living remained constant. Although it took time, and not everyone was eligible, the government did step in to assist.
Following are the reasons why emergency funds are important:
Keeps Your Stress Levels at a Minimum
You tend to live a more peaceful, stress-free life when you have substantial emergency funds. This is because you are confident that you have a backup strategy in place if something goes wrong or an emergency arises.
Keeps Your Savings Intact
With emergency funds, ensure you don't withdraw money from your future savings. These emergency funds cover your immediate expenses so that you don't have to take money out of your long-term assets and can fulfil your financial goals without any hassle.
Ensures You Don't Get Caught in a Debt Cycle
Emergency funds can keep you afloat through difficult financial circumstances without using loans or credit cards. Therefore, having emergency savings helps to prevent you from getting trapped in debt during a financial crisis.
What Is the Best Way for a Long Term Saving Plan with the Help of an Emergency Fund?
The pillar for any financial planning is proper budgeting. Follow these simple steps if you are just starting to save money for long-term emergency funds:
- Note down your expenses per month and divide them into discretionary and obligatory categories.
- Continue doing the same for the next few months until you get an approximate figure for the obligatory expenses.
- Further, this practice will help you know the expenses and eliminate all the unnecessary spendings.
You can never predict the time period for an emergency. Hence, it is ideal to save enough funds to cover the expenses for at least three to six months.
Although living within your means can be difficult, you'll be glad you did it when an emergency comes, and the overall effect on your financial well-being is modest. Concentrate on altering your thinking. Everyone can experience bad things, so focusing on your financial well-being should be equally important as taking care of your physical well-being. In this regard, an emergency fund acts as one of the best long-term saving plans.
FAQS on Emergency Fund for Long-Term Saving
Add up all of your essential living costs for one month, then multiply that sum by three or six, depending on how much money you feel most secure having on hand in an emergency.
Emergency funds help reduce stress by providing a considerable financial buffer that one can use in times of unforeseen circumstances. People tend to opt for loans to obtain the funds during demanding times which can increase the financial burden substantially. Emergency funds come in handy during such demanding times.
One of the primary drawbacks of emergency funds is that it reduces the scope of adding funds to other programs, such as retirement schemes, foreclosure of mortgage, etc.
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