What is a emergency fund?

An emergency fund is like a safety net of money that you keep aside for emergencies. These emergencies can be anything unexpected like losing your job, a car breaking down, a sudden illness or anything else that might need you to spend money that you did not plan to spend.

The reason we need an emergency fund is that it helps us handle these surprises without getting into debt. Imagine if your bike got broken and you had no money to fix it. You might need to borrow money from a friend or use a credit card, which could make you owe money plus interest. But if you had an emergency fund, you could use that money and not owe anyone anything.

Financial experts often recommend that an emergency fund should be enough to cover your living expenses for 3 to 6 months. So if you spend $2000 a month on everything you need, your emergency fund should be between $6000 and $12000.

Now, where should you keep this emergency fund? The goal is to keep it somewhere safe and easy to access. Here are a few good places:

Savings Account: This is the most common place where people keep their emergency funds. Savings accounts are safe because they’re insured by the government up to $250,000. They’re easy to access, and your money earns a little bit of interest over time.

Money Market Account: These are similar to savings accounts but typically offer a slightly higher interest rate. They’re also insured by the government.

High-Yield Savings Account: These are special types of savings accounts that offer higher interest rates than normal savings accounts. They’re also insured by the government.

Remember, the most important thing is that your emergency fund should be easily accessible and not at risk of losing value. So, even though you could potentially earn more money by investing it, that’s not the best idea for an emergency fund because the value of investments can go up and down. It’s best to keep it somewhere safe and steady.