Importance of Emergency Funds: 6 Reasons Why You Should have Emergency Funds
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Isn’t financial stability all we aspire to attain?
A large number of American families live paycheck-to-paycheck, with little to no savings cushion to fall back on in case of a financial emergency. A recent study found that nearly half of American adults (49%) would have difficulty coming up with just $400 to cover an unexpected expense. This lack of savings can often lead to negative consequences such as increased stress levels, credit card debt, and bankruptcy filings.
One way to help combat this issue is by reserving a set of money aside to cover uncalled-for expenses. We all know that emergencies do happen. Sometimes they are unavoidable, sometimes preventable, but either way, having an emergency fund can help you out in tough situations.
Importance of Emergency Funds: 6 Reasons Why should you have Emergency Funds
Having an emergency fund set up provides you with a ticket of peace, contentment, and long-lasting financial security.
There are countless reasons why you should have emergency savings; some of the important ones are:
#1. First, having an emergency fund can help you avoid debt.
If you have to take out a loan to bear sudden expenses, you will likely end up paying more in interest than if you had just put the money aside in the designated fund.
#2. Emergency funds can handle unexpected and unplanned expenses.
Suppose you do not have savings to bear your incidental expenses. In that case, it might be difficult to handle unanticipated and necessary costs without going into debt or losing your job for lack of time.
#3. The funds can cover the costs of replacement goods
If your home or car is affected by any type of disaster, you might need to replace some of your belongings. If you do not have backup cash, you will have to rely on a bank or credit union. Even minor emergencies like an accident with one of your appliances can leave people with a repair bill that is hard to pay for without having money set aside in advance.
#4. Emergency funds can help you take care of others.
The fund should also give you some flexibility when it comes to helping out others in need. If your loved one is in unforeseeable circumstances or has a medical emergency, having an emergency fund can help you provide support in difficult situations. Emergency stash can also help with medical and dental bills not covered by insurance plans.
#5. The emergency stash of money can protect against accidents and expensive mistakes.
While having a home or car insurance policy should always be in place, it is vital to have some extra money put aside to not be caught off guard if something happens unexpectedly. Staying up-to-date with auto repairs and choosing reputable auto body shops are also crucial for long-term car maintenance.
#6. The cash for emergencies can help you save for the future.
It is easier to plan for your future when you have an emergency fund. When you do not have a financial buffer, spending what little there is might be tempting. Having an emergency stock will keep you from buying things that could add up quickly and make a dent in your savings account at the end of the month. Saving money while having an emergency endowment is easier than trying to save when there are unexpected costs glaring in your pocket.
How Much to Save in an Emergency Fund
An emergency fund is the most important for your financial well-being; it is a place to put money that you can fall back on when emergencies arise. It is important to build up a fund, so you never have to depend on credit cards or loans when unexpected expenses arise. But one of the most frequently asked questions that we hear is, “How Much Should I Save for an Emergency Fund?”
People have different goals when it comes to the rainy day fund. Some people want to set aside a certain amount of money every month, while others would prefer to save a larger sum at once.
No matter what you prefer, we can all agree on one thing: It should be enough money to withhold at least 3-6 months of charges. Saving 3-6 months’ worth of expenses is going to be easier and enough to provide some peace-of-mind; that you could survive on your own in case something goes wrong.
One aspect to think about is if you have other debt accounts; If you already have a decent amount of credit card debt, then saving an extra amount will be difficult because it will be much harder to pay off that balance if something unexpected happens.
In this case, it is probably best to prioritize paying off that credit card balance before saving for an emergency fund. Or you can include your monthly debt payments into your savings so that in case of an emergency, you do not miss out on your debt payments.
How to Save for an Emergency Fund
Every individual has different priorities, and there is any number of ways in which you could put away your emergency fund. I would suggest you;
First, make sure you have a budget to know how much money you can afford to save each month and then contribute it from each paycheck towards the safety-net fund.
Second, automate your savings to transfer the money from your checking account to your savings account; this will help you avoid the temptation.
The two ways are believed to help the most in saving for a sudden emergency.
When to Spend an Emergency Fund
An emergency fund is an integral part of personal finance and should be considered when creating a budget. A person reaches the level of financial stability when he has successfully put aside a good amount in the name of an emergency budget. It is to take over unforeseen expenses from your shoulders, such as sudden job loss, medical bills, car fixes, etc.
But when is the right time to spend your emergency fund? There are a few scenarios where it might be appropriate to use this money. For example, as I stated earlier, if you lose your job, you may need to survive for a few months too many, using your emergency fund to make ends meet until you find a new job. Or, if you have a significant home repair that needs to be fixed right away, you can use the fund.
Other reasons to spend an emergency fund:
- To cover unforeseen expenditure in case of natural hazards
- To take advantage of a life-changing opportunity; A life-changing opportunity could be anything like a job change that offers better pay
- Or to avoid debt
Look for the worth of expenses; if the fees are unavoidable and will cause significant hardship if not paid, it is an excellent reason to spend the emergency fund. You should never touch an emergency fund unless it is an actual emergency, as using it for small purchases can burn through it quickly.
Once you have saved up enough for 3-6 months worth of living expenses, you should start an investment account and start investing your extra money. This will eventually help you in becoming financially independent.
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Why is an emergency fund important?
A well-funded emergency fund can be the difference between weathering a financial storm and going into debt. Unexpected expenditure can quickly deplete your savings and put you into arrears if you do not have a backup to rely on.
An emergency fund is also crucial for protecting your credit score. If you have to take out a loan to deal with unexpected costs, your credit score will take a hit. A high credit score is vital if you want to qualify for a mortgage.
It is important because If you do not have an emergency fund, you may have to resort to using credit cards or borrowing money from family and friends, leading to debt.
If you have a regular income, you should also aim to keep 10-12 months of living expenses instead of just three to six months. This will give you enough money to face anything God has planned for you to endure.
What is the most important requirement for an emergency fund?
There is no one-size-fits-all answer to this question, as the most important requirement for an emergency fund will vary depending on the individual’s income. However, there are some key things to consider when determining what is most essential for you.
One of the most important factors to consider is your earnings. If you have a steady job and a reliable income stream, you may not need as large of an emergency fund as someone who is self-employed or has a variable income.
Another important consideration is your expenses. If you have high monthly payments, you will need a larger fund to help you tackle and be in the safer zone.
Lastly, an essential requirement for emergency savings is to be accessible when you need them. You should have easy access to your emergency fund in case of an unexpected financial emergency.