Understanding the ‘emergency’ nest egg concept

The following article explores what you need to know about emergency funds and how to set up one.

18:29 30 January 2014

An emergency fund comes in very handy especially when you are not really sure when the next pay cheque will come.

 

Savings are essential if your end goal in mind is financial stability. However, you cannot really tell when an emergency will strike you. If you do not have cash in hand, you will be in very difficult situation. That is why you should have a nest egg or some sort of savings that you can turn to when things turn rough. 

 

What is this emergency fund?

The simplest explanation for what an emergency fund is as follows: It is a piggy bank, that money you have in your shoe box that you can turn to when things get rough. It is important to make the distinction between a slush fund and emergency fund. Slush funds cover you for the big emergencies whereas an emergency fund keeps you covered when the less serious things hit like serious illness. 

 

Why should I have an emergency fund?

These types of savings are a sort of insurance fund. The whole concept of insurance is to cushion you in case of a risk that has caused imminent damage. An emergency fund ensures that you have the requisite financial security to keep you going until you have another source of income.

 

How much is enough?

For your emergency savings fund to work, you should consistently put something in the pot. Experts have different approaches to this. Some say that you should have a minimum six months living expenses. Others advocate for a year’s living expenses. Ideally, six months should be enough.

 

Overall, when you are looking to stay safe, you should make sure that you have a fund ready to go should something unforeseen happen.