Life is full of unexpected situations that pop up when they are least convenient. Having a cash cushion to fall back on is something that everyone needs, regardless of their current financial situation, because credit cards and loans might not always be an option.
If you had a medical emergency or suddenly lost your job, are you confident that your funds will see you through it all or will you have to resort to racking up costly debt?
What is an Emergency Fund?
Simply put, an emergency fund is a cash savings amount that is set aside for dire times. The savings should be liquid for quick and easy access in a pinch. An emergency fund is also the foundation of your financial planning; this is a strong safety net to have before choosing to take on any investments.
Unlike planning and budgeting for big events, vacations or big-ticket items, your emergency fund is liquid savings that will see you through tough times like sudden unemployment, medical expenses, major home repairs, natural disasters, moving costs, family emergencies or unexpected travel overseas.
Although no one wants to think about difficult times, having a financial safeguard set aside will not only give you peace of mind and freedom from living paycheck to paycheck but also help you through a crisis without the stress of scrambling for cash that might be tied up in different accounts. An emergency fund also keeps you from dipping into your other investments, like retirement plans and college funds, whenever there is an unexpected expense.
Where to Keep Your Emergency Fund
Your emergency fund should always be in a separate account to your checking and regular savings accounts so that you avoid periodically dipping into it.
Whenever possible, look for an account that offers a decent interest rate and is easy to access quickly when needed. Of course, finding a high yielding and accessible account will be difficult in Japan, where banks pay virtually zero interest on your Yen.
You may be tempted to look for a high-yield savings account, but just keep in mind any fees or special terms that come along with them. The last thing you would want is to have the emergency funds tied up in a withdrawal period or needing to take certain withdrawal steps before the money is released.