Build an emergency fund today

Many people ignore personal advice because it appears complicated or it is otherwise left to those who have money to plan. Traditionally planning for money in one’s life is unnecessary because of the common belief that “tomorrow will take care of itself.” Of course it is good to have faith in tomorrow’s good turn but living your life without proper financial planning is like signing a lifelong contract with your present state of poverty. One of the most basic aspects of personal finance is the emergency fund. Everyday, we live in a world where a simple accident could result in a permanent incapacitation, where a job could be as a secure today and gone tomorrow. More that often, we have to deal with emergencies of family like the death of a relative, a sudden need to move to a new house or an expected medical bill. This is where an emergency fund comes in handy. Personal finance advisers say that it is important for everyone to have about three to six months worth of your monthly income. For anyone who leaves from salary to salary (for lack of better phrase), it is almost insulting to tell them to keep six months of salary to wait for a calamity. Believe me because personally it seemed like that. But look at the logic. Every month, one or the other emergency is popping up and making sure that your monthly budget is trained, if someone gave you a six month’s salary to fall back to in severe cases, what damage would it do? The advantage is that if you took the trouble to save six month salary you would be very hard pressed by an emergency to fall back on your emergency fund and that is exactly the point. Financial freedom is about being able to cover your normal costs, your emergencies, and still being able to have investments growing your money so that you don’t fail to sleep because you cannot pay for a basic need like an unexpected car breakdown. Besides there is no need to save and put the money in bank which pays a meager interest rate which after factoring in the prevailing inflation rate, you are actually losing money? So savings need to be invested appropriately in short term, medium term and long term investments. Ideally it would not make sense for one to own real estate worth twenty thousand United States dollars while you cannot pay for an urgent medical expense because it takes one to liquidate your investment in hard usable money. Therefore, an emergency find is the first real step to real savings for any purpose and real investment with subsequent financial freedom. After building a sensible emergency fund, one can then afford to buy long term stocks or bonds because they know they have money to solve any urgent problem. The emergency fund is the first real practice run in regular saving. It is the door to real financial freedom.One would ask. Should a person separate an emergency fund from savings? No an emergency fund should either be kept in a very liquid savings account or in a fund that can promise gains but also easy liquidation at least for the beginning. Initially, put your emergency funds in a normal low cost savings account but later you can put it in a financial tool that promises more returns as long as it remains liquid enough. Whenever a portion of your emergency funds is put to use it should be built back quickly. As a result, if you have set a regular 10% deduction from your monthly income for savings for a particular purpose say buying a car or a house, an emergency will not cripple your saving plans. kelviod@yahoo.com