The emergency cushion is highly essential because this can help you tide over when you are tight. It is needless to mention that you come across several situations when you find yourself running out of money.
This corpus can help you meet your ends at that time. You all know that this can help you tide over during a rainy day, but the question is how much a big emergency cushion should be so you do not need to borrow money.
The emergency fund is nothing but a savings account in which you are to regular transfer money when you receive your paycheque. Depending on your income and everyday expenses, you set the limit ranging from 5 to 20%.
A rule of thumb says that you should have an emergency corpus six-month worth of living cost, but many people have reported that this often falls short of cash during emergencies. For instance, when you lose your job.
The recent pandemic phase has been the most prominent example of believing that even savings of six-month worth of living costs may not be enough when you lose your job. So, what is the best size for an emergency cushion?
Most of the time, you are to pay down enormous debts, for instance bad credit car loans in the UK. While you have to pay down these debts, it can be a bit tough to set aside money for a rainy day enough to make ends meet until you bounce back.
Good, better and best
You can categorise the emergency cushion into three categories: good, better and best.
A good fund, you can say that you have a good emergency cushion as long as you have put aside three-month living cost. It means you can manage to make ends meet until three months, even if no cash is coming in.
This amount will cover all of your fixed expenses like mortgage and other debt payments and variable yet essential expenses like utility bills, food and travel. Of course, there will not be any room for inessential expenses.
This time you will be living off a lean budget. A reasonable budget is helpful for those who are single. When you do not have dependents, you can manage with this size of the emergency cushion. If you have a family where your spouse or children are dependent on you, the size of a reasonable budget will go from three months to the six-month worth of living expenses.
- Better fund
A better emergency cushion is six-month worth of living expenses. If you are single or no one is financially dependent on you, this size of emergency corpus says this is enough for you to get by quickly.
Since this amount is considered the minimum when you have some family members dependent on you financially, a better emergency corpus is a none-month worth of living expenses. However, experts believe that it can be somewhere between six and nine months.
- The best fund
The best emergency fund is the one that is a 12-month worth of living expenses. According to financial experts, this size is considered the best for a financially dependent person. However, this is usually possible only for those who earn a very high amount of income.
You don’t need to strictly follow this rule because it depends on your income and everyday needs. Here is how you can create an emergency cushion that works out for you: You can also read: Water flow Sensors: Types and Advantages
Cut down on your discretionary expenses.
It’s crucial, and you cut back on discretionary expenses if you want to create an emergency cushion quickly.
A rule of thumb says that you should look over your monthly spending to see how much you spend on inessential expenses.
It does not allow the interpretation that you cannot eat out or go to the club or pub, but you should keep them as little as possible.
Increase your income sources
If you are struggling to set aside money for savings for a rainy day, you should try to increase your income.
Try to get a new job that offers you higher money, or you can talk to your current employer if they can give you a hike.
Tell them of your actual financial condition as giving genuine reasons can help you convince them. It would help if you also looked for a part-time job or freelancing.
Be careful of debt
Though there are some expenses you cannot control over, for instance, debt payments, you should be careful about it. Borrow money only when you need it urgently.
As long as you can manage to put it off, do it. Although you can afford to pay back the money, you should avoid borrowing to save money going in interest.
You can divide the emergency cushion into good, better and best, and it depends on your income and regular needs how much you manage to stash away. A rule of thumb says it should be enough to fund a six-month worth of living expenses.