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Emergency Fund: What is it and how to use it?

Just seeing the term “emergency fund” can strike up imagery of medical bills or home repairs, but that is not the only thing they are suitable for.

Emergency Funds is essentially a bit of saving that you only use in the case of financial distress. Another name for it is “rainy day funds”, but in a dryer climate like Australia, that doesn’t seem very apropos. One might have to dip into “rainy day funds” because it hasn’t rained. Nevertheless, you get the idea.

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Why have one?

Many might look at Emergency Funds as unnecessary as “isn’t that what savings are for?” Yes, Emergency Funds are just another form of savings, but they are mainly for when you have financial hardship. These hardships can be anything from the aforementioned medical or home issues to the loss of a job, or something as exciting as starting a new business. It’s all how you look at it.

The big question might be, “how much emergency fund should I have?” Well, we’re glad you asked.

As stated in the fantastic emergency fund breakdown over on Investopedia, “The best size for an emergency fund depends on a number of factors, including your financial situation, expenses, lifestyle, and debts. Many financial advisors recommend saving enough to cover anywhere between three to six months’ worth of expenses, which can help you weather a modest healthcare bill or short bout of unemployment.”

Think about it like it’s behind glass

Unlike your everyday savings, an emergency fund should be slightly more challenging to access. Almost like it’s those emergency buttons behind glass. It’s a safety net. While some people keep these funds in a traditional bank, others keep them in investment funds or digital wallets. A popular option is to place the funds into something like the investment app Raiz as it’s easy to put in money, easy to save and access. Because you’re investing the funds, you’ll make more on it than standard interest rates in a savings account.

We have to note that Raiz has no official partnership with us, and there are many options out there for investment apps. Do some research and see which one works best for you. We did another blog on the different investment apps here to get you started.

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Use it to sharpen the financial blade

Using your emergency fund should be a last resort, and using those funds should cause you to be hyper-aware of why that money is needed and how it’s being used. It’s a hand way of sharpening your financial awareness because instinctively, you’ll want to stop using that money and start saving it again as quickly as possible.

While this blog is just a basic overview of starting and the reasons behind an emergency fund, it should be something that you institute into your budget as soon as possible.

If you would like help going over your financials with an expert and discussing emergency funds more, our team of experts would love to help you get on that journey of Less Debt More Life!

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