Planning for emergency financial situations

Emergency financial situations can happen to anyone and any financial planning exercise is not worth without planning for such events. The entire idea of having an emergency fund is to provide a cushion against any unforeseen expense so that it doesn’t rip off the entire financial security and doesn’t adversely impact other necessary activities.

There are many situations which can cause a financial emergency like an accident, sudden illness, unexpected operations or medical emergencies, loss of a job, emergency house repairs, emergency car repairs etc.

The importance of having an emergency fund is visible when a person falls into one such situation and has to borrow on high interest rates, or break his regular savings, or has to compromise severely to get the required money.

It is not uncommon to find people who simply take out their credit card and swipe it for hard cash in an instant. Contrary to popular perceptions, credit cards are the worst way to fund any financial emergency. In a situation where you have taken a cash advance with your credit card to get the required money, the credit card company will charge you an upfront cash advance fee along with an interest rate of over 35 percent per annum! This is indeed a very costly way to borrow and arrange finances for emergency situations.

So, what is an ideal amount that should be kept aside as emergency money? There are varied opinions on it most experts agree that a minimum of three to six months worth of monthly income should be set aside for emergency purposes. This amount can vary according to lifestyle, marital status and the size of family one has to support.

These funds should be kept aside in an instrument, which is easily available when required. It could be hard cash, or in a bank account with ATM or Debit card facility, fixed deposits or liquid funds etc. so that they can be accessed almost instantly or within a short period as and when required.