Emergency Funds and Its Levels

For many years, from the time I have heard about emergency funds. Then, I thought there was the only one which is a basic level of Emergency Fund. While talking to one of the other financial counselors, I realized there are actually many such levels.

Before we move directly to the levels of these funds. Let’s discuss a bit about how and why to build an emergency. As the name suggests, it’s a fund accumulated to help you fight against financial emergencies. A single unexpected situation like hospitalization or divorce can sweep your years of effort to maintain the credit score. And then, you would definitely agree with me if I say these emergencies are unavoidable and come in every individual’s life.

You cannot build an emergency fund in a day or a month. It takes time. If, however, you don’t plan appropriately, it may take much longer than you plan to build one. Hence, it is suggested to have a plan before you initiate accumulating. If you have a budget, set aside some amount to save for emergency fund. You can also dump all the extra and unexpected income to increase your fund.

Your planning stage must involve the level of an emergency fund you intend to accumulate. According to the counselor I met, there are six levels to chose, depending on the number of people in your family and earning members.

  • If yours is a family with dual income sources.  Jobs are quite stable with good income. So, You can probably survive an emergency by having a fund that has 3 month’s household expense.
  • If, however, yours is a family with a single income source. The job is quite stable with good income. So, You can probably survive an emergency by having a fund that has 5-6 month’s household expense.
  • If yours is a family with dual income sources. Jobs are quite stable with ‘variable’ income. Then, You can probably survive an emergency by having a fund that has 6 month’s household expense.
  • If yours is a family with a single income source. The job is quite stable with ‘variable’ income. So, You can probably survive an emergency by having a fund that has 8-9 month’s household expense.
  • If yours is a family with dual income sources. Jobs are ‘unstable’ with ‘variable’ income. So, You can probably survive an emergency by having a fund that has 10-12 month’s household expense.
  • If you are self-employed or a business owner. Having an emergency fund of more than 12 month’s household expense is advisable.

The point he tries to make here is interesting. If financial situations and emergencies vary from house to house, why should an emergency fund be equal for everyone?

 

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