What is emergency reserve?

We all have faced unexpected financial emergencies in life like an unexpected health issue and medical bill, factory production machines not operating properly, a damaged cell phone, or even loss of income. No matter if the expense is large or small, these unplanned expenses often happen when we are going through our worst times. Facing all those unexpected issues the concept of “emergency fund” hit our lives. 

What Is an Emergency Fund?

An emergency fund is a cash money we reserve for those emergency cases. This amount is specifically reserved for unplanned expenses or financial emergencies.

Usually, emergency funds can be large or small to solve unplanned bills or payments that are not part of your routine monthly expenses and spending. It can be dependent upon your daily or monthly operations. 

Why is an Emergency Fund Important?

Life is so unpredictable. Unexpected expenses can occur at any time. A financial reserve can help you when you are facing financial storms like medical emergencies, unexpected home repairs, unplanned machine repairs. The amount can be small but in time of your need it will appear in a large size in your life. If you do not plan for a reserve or emergency fund, you may have to be forced to borrow money from others and have to face interest expenses.  

An emergency reserve can also give you security and freedom. You can focus on your goals, plan for retirement or buy a house, when you know you have money for emergencies.

Benefits of Having Emergency Reserve

• Stress Free Life: There is no doubt that in the time of emergency and financial well-being threats cause stress. If you are not living in a safety net, you are living on the risk of running into a crisis. Being prepared with an emergency reserve can give you the confidence that you can handle any of the unexpected situations of life without worries about money.
• Prevents Unnecessary Expense: Unnecessary spendings are nothing but a waste of money. You should always answer the question before spending money “What benefit will I get from this spending”? You can avoid making unnecessary purchases if you have a plan to create an emergency fund.  
• Saving behavior: In the journey of creating an emergency reserve, it will leave you with a saving behavior. It will build a cost saving behavior inside you. And it will help you the rest of your life. 
• Avoids Bad Debt: Emergency reserve will help you when you will be in a bad financial condition. It can be your umbrella when you are unable to pay your credit card bill within the due date. So having an emergency reserve can save you from bad debt.  

How to Create an Emergency Reserve

There are several ways to get your savings started. Strategies can be decided according to your financial conditions. It totally depends on your money management skills. To cover three to six months living expenses, it can take one individual month or even years for some individual to save that much money.  Here are some suggestions to how you can build a financial reserve:

Small Start: If you planned to save a large amount of money at the beginning, it will seem so hard for you. At one point you may lose your interest. So, start with a small goal. Start saving small amounts like $50 – $100. Once you reach your primary goal, set another goal. In this way you can make your emergency fund slowly and easily. 

• Set Specific Goal: Having a specific goal will help you to stay motivated. If you set a goal of an emergency fund that may be achievable for you will help you to stay on the track. Calculate how long it will take you to reach your goal, based on your saving behavior. Set a time frame and amount goal. Your emergency fund will help you to reach your goal easily. 
• Cut Unnecessary Costs: Look into your monthly expenses and find how to lower them. Reduce unnecessary spendings like unused subscription, unnecessary utility bills, unnecessary energy consumptions. 
• Consistent Contributions: Make your contribution constant, otherwise it will not work. If you save money in the first month and fail to meet the same amount in the second month, it will be hard for you to reach your goal. So, you should save money constantly. 
• Monitor Progress Regularly: Monitoring your progress regularly will help to understand whether you are going in the right direction or not. It will also help you to find how many days it can take to reach your goal. 

How Much Money Should an Emergency Reserve Have?

Emergency reserve is the money we save to protect us from unavoidable situations in the future. There is no perfect answer for the question of how much money you should have as an emergency reserve. It totally depends on your needs. Different people have different estimated emergency reserves, income and spending habits.  

Generally, emergency reserves would be somewhere between your three to six months living expenses. This includes expenses which you cannot avoid. For example, house rent, utility bill, debts, and food expenses. 

And if you are reserving money for business emergency purposes then the amount should be much bigger. It should be as big as you can run our business expenses for three to four months if any unavoidable situation happens. 

However, you should not reserve a huge amount of money as your emergency fund. Rather, you should reserve a minimum amount that can bear your three to six months expensse and with the rest of the money, you should go for a profitable investment. 

Where Should You Keep Your Emergency Reserve?

You can store your emergency reserve in many places. It actually depends on your situation. But make sure that your reserve is in a safe place and you can have it whenever you want.  

Suggesting you some options, where you can put your emergency savings, and you can choose one among those that makes the best sense for you:

• Cash: The easiest option is to keep your emergency reserve in your hand. You can keep emergency reserves in your home or in a trusted family member or friend’s house. But keep in mind that it will not be a secure way, cash can be stolen, lost, or destroyed.
• Prepaid Card: Prepaid card is a card that can store money. It is not connected with any bank or any financial institute. You can only store or load money and spend the amount that is on your card. 
• Bank or Any Financial Institute: Bank is the best place for emergency reserve. If you already have an account, you can save your monthly savings there as your emergency reserve. It will be safe and on top of that you will get some interest which will accelerate your savings. It is better to open a dedicated account for emergency reserve so that you do not make any withdrawal. 

However, when it comes to emergency savings, you should avoid high risk investments like stocks, bonds, ETFs, or mutual funds. Because Emergency funds should be kept for short to mid term and risk free investment. Because you do not know when it will be needed. So, invest it from where you can access it anytime. 

When Should You Use Your Emergency Savings?

An emergency reserve is your financial safety and it should be saved for unpredictable situations. You should use your emergency savings in the situations like: 

1. Medical Emergencies:  If you face any unexpected medical emergencies like illness or severe injury, you cannot avoid those situations. So, you have to reserve an emergency fund to tackle this type of situation. 
2. Job Loss: If you lose your job all of a sudden or are facing income reduction, you have to survive and have to pay for your daily needs. Your emergency reserve will work like a shield at those hard times.
3. Car Repairs: Unexpected repairs can be costly sometimes. If your car broke down in the middle of the road you will have to repair it and bring it back to your home. Your emergency reserve will help you to get out of this hustle. 
4. Home Repairs: When your home needs emergency repair you cannot avoid it. At that moment your emergency savings will be your lifesaver.
5. Natural Disasters: Some situations will never be in your hand. If your surrounding is affected by a natural disaster like hurricane, flood, or earthquake, your emergency savings can help you cover those situations. 
6. Business Emergency: If your business is going through a loss, your machinery needs to be repaired or your buyers are not clearing your payments, you have to run your organization. You have to pay utility bills, factory rent, and human resource remuneration. Your emergency fund will help you to recover from this situation.      

What to Do After Having an Emergency Fund

After you have reached your savings destination, you should have to put your money in an easy to access and secure place like a savings account. Though you will not get a good interest return from it but you will get an easy access to your money and a security. Once you secure your emergency reserve goal, then you should start saving for your dream house or for a dream car. 

In conclusion, Life is so uncertain. To maintain financial stability an emergency financial fund is essential. In the worst situation of life managing unexpected expenses, and providing peace of mind is more important. Emergency reserve is the vital component of financial planning. Also, It is an important tool for achieving both short-term and long-term financial goals. It is recommended to keep at least three to six months worth of living expenses saved in your hand as an emergency fund to tackle unexpected situations. Although, the amount may vary depending on different individual circumstances and risk tolerance.