Emergency Fund: First step towards debt free life

Why do you feel safer in cars that have airbags? Because you know in case of an emergency it will provide an extra cushion, will protect you and reduce the damage. In life’s journey which is full of unexpected events, wouldn’t you feel more secure and safe if you have a extra cushioning?

If your answer is yes, then an EMERGENCY FUND is your cushion.

What is an Emergency Fund?

An emergency fund is simply money you’ve set aside for life’s unexpected events. For starters, it should be equivalent to $1000 (or INR 20,000). It should only be used for true emergencies only, like a sudden visit to a doctor.

An emergency fund is not for…

Buying a new iPhone on the launch day or clearance sale at the shoe store or Amazon. It should be used only for true emergencies.

An emergency fund is for…

Unexpected mandatory house repair, or a sudden visit to a doctor, or if you leave your job suddenly.

Why an Emergency Fund?

Let me ask you a simple question if I tell you it may rain today, what will you do? Carry an umbrella that is be prepared for it, right? Similarly, you don’t what is going to happen in life. When life’s journey takes an unexpected turn, your Emergency fund will come in handy. It will protect you in a similar way your country’s army protect you from the unknown. You will be prepared instead of getting caught off guard.

When I was serving my notice period to my last employer, they withheld my salary for last month. I needed about INR 19,000 for basic needs and utilities. My emergency fund came in handy to keep the lights on and put food on my table for one month. Even though I had no income coming in, I was stress-free & mentally at peace. It would have been Superbad if I had no emergency fund.

How much is my current emergency fund?

My emergency fund is about INR 25000 (equivalent to about USD 1200). I recommend everyone to have at least USD 1000 as an emergency fund. Build your emergency fund as fast as possible.

Quiz:

John just found out that today is the last day for Amazon mega sale and only a couple of hours are left. Should he go ahead and use his emergency fund to buy a pair of shoes he always wanted for $300 as they are available at a 30% discount?

Let me know your thoughts in comments.

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