Question

After reading a few investment books, you decide to take the plunge and start investing in a few securities, bonds, etc. However, you realize that an emergency fund is needed before you take the next step into investing. What is an emergency fund and what should it be used for? How much will you set aside for the emergency fund? Why did you choose this amount?

Answer 1

Emergency fund is the fund which is created for the puprose of meeting some unexpected circumstances or which can be used in the hour of crisis.Normally, it is used in the circumstances when that unexpected event had arised. For example you should put some money in emergency fund in case for some reason you have to leave your job. These funds can take care of your expenses in that circumstances. Emergency funds are used when the unexpected circumstances had arised and not for day to day routine expenses.

The emergency funds can differ from person to person and depends on their earnings level and standard of living. It is said that you should keep an average of 3-6 month of your monthly expenses in emergency funds. Let's suppose your monthly living expenses are $3000, you should have an emergency fund of somewhere between $9000-$18000. This amount is an approximation based accepted norm because circumstances will change and you might find another employment within these time period or you will find a way to deal with the situation.