Life is unpredictable. It’s sometimes full of uncertainty. It is so important to not just live for today but to also plan for the unexpected. An emergency fund is crucial to your financial security.
What is an Emergency Fund?
As the name suggests an emergency fund is set up with the idea of saving for a rainy day. When an emergency arises or an unexpected event in life occurs, you may need finances. In this scenario an emergency fund is just the thing you may need. Therefore, an emergency fund is money that you set aside for unforeseen expenses.
An emergency fund can be a savings account, mutual fund or an account that you have quick access to. The idea is not to have the finances tied up as you may need to withdraw from without restrictions. Financial advisor Dave Ramsey recommends saving 3 – 6 months or more of your salary. I’m not affiliated with Dave Ramsey or any of his financial companies. Moreover, I’m just sharing facts that have been tested by others who have been in this field quite long and have been proven to work.
An emergency should be part of your budget. It is important to establish a budget so that you can track your spending. As you are budgeting make a conscious effort to set aside a certain amount of money each month to building an emergency fund. If you would like to learn more about creating a budget, then check out the article 9 Simple Steps To Create an Achievable Budget. It’s a practical and sequential guide to creating a budget.
Are You Prepared for a Financial Emergency?
Ask yourself, “Am I prepared for a financial emergency?” According to Ramsey Solutions research, 48% of Americans said that they would not be able to meet their expenses for 90 days if they lost their job. Further to, 33% of them said that they do not have any savings, period.
With the cost of living rising, it’s so critical that we reassess our spending habits. You may want to check out the article as it shares some thoughts on having your money work longer for you. Furthermore, it’s important to plan for down the road of the unknown. No one knows what lies ahead. However, applying wisdom, it’s better to prepare than failing to prepare.
Here are 10 Simple Reasons Why You Should Build an Emergency Fund:
1. Medical bills
If the COVID pandemic taught us anything is that we need to have savings for a rainy day. I know of so many who were home, got very ill and not have a dime come their way. Still, you never know what medical bill you will need to cover in the future. It could be a simple surgery or something major. Hence an emergency fund can be a life saver in situations like these.
2. Long Term Prescription Bills
As you may already be aware that medication is quite expensive. A medical condition that requires long term treatment can max out insurance deductible. Thus, an emergency fund can assist in offsetting these costs and reduce the level of stress during those challenging times.
3. Job Cuts
As much as we would like to think that our jobs are forever that is not always the case. Unless you get tenure or acquire a permanent position. The world we are living in today job security is up in the air. I’ve seen people who have been with companies for 15 years or more get terminated. If someone should lose their job, an emergency fund helps to cover living expenses while they search for a new one. Additionally, they can continue living a certain measure of lifestyle without drastic changes.
4. A Loved Ones Falls into Financial Trouble
If someone you care about should fall into financial distress, then having an emergency fund will give you the ability to help them. Further to, you will have the finances necessary to support them without directly draining your own resources.
5. House Repairs
With the changes in climate, we are seeing places that have never experienced flooding, hurricanes or tornadoes hit catastrophically. Today the threat of forest fires is more real than ever before. House repairs can be quite a hefty sum of money. Having an emergency fund will ensure that you’re able to finance repairs without the need for a loan.
6. Car Breaks Down
We’ve all been there. Indeed, car trouble can occur at any time. Repairs can vary in cost ranging from a couple hundred dollars to thousands depending on the severity. However, an emergency fund prepares you for such expenses.
7. Appliances Breaks Down
Appliances can fail causing significant cost to repair and even more to replace. There are some that you cannot live without. For instance, a refrigerator or stove are two major appliances that are essential for everyday living. By having an emergency fund, you are able to have those replaced and not add a dent to your personal savings or worst yet, having to wait until your paycheck arrives.
8. Gives Peace of Mind
Ultimately, the goal of an emergency fund is to provide you with financial security. It can be quite reassuring to know that you are equipped for any hiccup that may come your way. This can give confidence in knowing that you have some money available in the event that something should happen.
9. An Emergency Fund Acts Like a Safety Net
An emergency fund acts like a safety net. During financial uncertainties it helps eliminate stress and worry giving. Additionally, it gives you peace of mind knowing that you have some funds necessary to see your through. Allow yourself to reduce the burden of unexpected calamities by building an emergency fund today.
10. Avoid Financial Debt
In the event of something should happen and you need quick access to money, an emergency fund can provide you with the money you need instead of having to use a credit card or having to take out a loan. This way you have better financial security and avoid financial pitfalls. As a bonus, you won’t have the added weight of paying off debt as well as having to dealing with your situation.
When do I start an emergency fund?
The answer is simple. Start saving today. Begin with any amount and progressively increase until you reach the suggested goal of 3 – 6 months of your salary.
Final Thoughts
An emergency fund can help alleviate some of your worries. In addition, it provides comfort and makes you feel safe in times of no income. It can help you or your loved ones cover expenses without a drastically changing your way of life.
Should a challenging situation come your way, you can avoid taking an out a loan, mortgaging your home, dipping into your retirement account or investments. You will be prepared for whatever comes your way. In this way, you are on your way to having financial freedom.
Send this someone you know who will benefit from this article. Have you begun building an emergency fund? Share your thoughts in the comments below. We’d love to hear from you!
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