Understanding the Concept of Emergency Cash

Many people are focused on the idea of saving for the future, investing in various stocks, shares and accounts and preparing for what the future may hold. However some people completely forget to account for emergency cash in this picture – cash you’d need to lay your hands on in a hurry if the situation ever arose.

What is emergency cash?

Generally speaking, this is the cash that would pay your rent or mortgage. It’s also the cash that would pay your bills and keep you afloat for three months if you suddenly found yourself with zero money coming in. This might sound like a worst case scenario and it is, but it’s the reason why you have to generate an emergency cash fund in case you ever need it.

How would you cope if you lost your job?

This is normally why you’d find yourself with zero income. It’s easy to think you’re in a safe position at work, but plenty of people lose their jobs every month and never see it coming. It’s also the case that plenty of people have made no provision for this type of event – an event that has become more common owing to the worldwide recession.

If you already have an emergency fund, congratulations are in order. You know you have enough cash set aside to pay the bills for a three month period. This means you’ve got three months to find alternative sources of income so you are safe from real financial worries. It’ll still be a worrying time of course, but it won’t be as bad as it might be otherwise.

Resolve to set up an emergency fund today

If you don’t yet have the cash you need, today is the day to start amassing it. There are two main criteria an emergency fund has to meet:

* It has to be in an instant access account
* It has to cover three months’ worth of outgoings

Figure out how much cash you can save into your fund every week or month and build it up as steadily as you can until you hit your target amount. For example, if you need $1500 a month to meet all your bills, you will need $4500 in your fund. If you can save $250 a month towards this target, it’ll take 18 months to hit your target. Even if something happens in the meantime, you’ll have more cash set aside for emergencies than you’d have had otherwise.

Some people dip into their emergency funds for other reasons too. For example they suddenly find they need a new refrigerator and they need to pay for it quickly. In this case they’ll use the money they need to solve the emergency, and then work to replace it as quickly as possible out of their earnings until they achieve their emergency balance again.

As you can see, it is incredibly important to make sure you are prepared for the worst. At least then if it does happen, you are in a position financially to cope with it.