Having an emergency fund is an important undertaking that will allow you to have a cash buffer in case something happens and you find yourself in urgent need of cash. This is something that many financial advisors will tell you, but then again, they do not tell you how much money is enough.
We must first define what type of emergencies you might likely encounter so that we can determine the amount that would likely be enough to have in an emergency fund. The term emergency can be used widely. It could mean a medical emergency or a situation where you end up losing your job, your salary is delayed, and you need cash to cover your current expenses before the next paycheck comes.
An emergency could also be capital infusion for your business at a critical stage in its development. It could also be a situation where you need cash to invest in an opportunity that has suddenly emerged. The amount of emergency cash you need will vary depending on the type of emergency that you encounter.
The amount that you need in your emergency fund
The good thing is that we can determine to an extent the amount of cash that one would need for an emergency depending on their needs. The best approach involves calculating the amount of money you spend on your expenses for at least 6-months. For example, if you pay rent, then that will be one of your expenses, and then there are other expenses such as the cost of food, medical costs, and the cost of regularly moving from one area to another.
Once you factor in all your regular costs, you will come up with a figure of the amount of cash you would spend on average over a six-month duration. Six months is enough for most people to get back on their feet, whether to recover from an accident or look for another job or start a successful business.
Having an emergency fund does not necessarily mean that you expect the risk event to occur. It means you will be ready in case it occurs. In the meantime, you can invest the money in a low-risk investment avenue so that you can benefit from some extra growth. Make sure you still have a high level of liquidity so that you can quickly access the money if you need it.