Emergency Funds and How to Plan For Financial Shocks
Borrowing to cover unexpected bills can be the start of a financial hole that’s difficult to come out of. Having an emergency fund set aside for this unexpected circumstance can save you from creating a hole.
An emergency fund is money saved aside for unanticipated expenses in life, such as auto repairs, hospital visits, and even job loss. This money offers you the authority to pay over funds to cover huge and little surprises that may arise.
These economic challenges can happen to anyone but how would you be able to scale out of the situation if it came out of a reduction in salary or unemployment? Or an unexpected circumstance that happens out of the blue?
Even during the prosperous decade of the 1990s, many people failed to put away enough money for rainy days. In this article, we will look at the importance of emergency funds and how to build an emergency fund.
Understanding emergency funds
An emergency fund should not be mistaken for a non-emergency account; instead, it should be a defined reserve of several months' worth of living expenses stored in a safe, accessible bank account that you only withdraw from in case of necessity.
You may already have a savings account to which you contribute a little money on occasion, or you may have set up a separate fund to save for a down payment on a home or a dream vacation, but your emergency fund serves as a safety net in critical situations.
You may not think about your emergency fund much when you’re doing well financially, but its actual significance becomes evident when you need it. The primary purpose of an emergency fund is to cover unexpected expenses that are not part of your regular budget. This can include medical bills, car repairs, home maintenance, appliance replacements, or unexpected travel for family emergencies.
Building an emergency fund is a gradual process, you can start by setting specific savings goals and allocating a portion of your income each month to fund it. Periodically review your emergency fund and adjust your savings goals as your financial situation evolves.
How to build an emergency fund
Saving money is the first step in creating an emergency fund. While they may not be as glamorous as high investment returns, savings contributions are essential to your financial stability.
Finding out how much you need to save is one of the first stages in creating an emergency fund. This will enable you to create a realistic objective. After that, you can take certain actions to simplify the storing procedure.
Consider it this way: You get to save, not because you have to but because you need to!
Below are different steps to take that will make your saving journey a success.
Automate your savings: Automate anything you can, even if it isn't just for savings if it is available to you. Your employer is a further option for automated savings, some workplaces allow you to divide your paycheck automatically between your checking and savings accounts. The majority of savings accounts allow you to set up automatic savings rules that will transfer money from checking to savings each time you receive a paycheck.
Manage debt while saving: Finding the right balance between saving and debt management is important. You may divide your objectives into paying off debt and creating an emergency fund, make sure you at least pay the minimum amount due on your debt accounts.
Monitor your progress regularly: Tracking your progress is one of the best ways to stay on track, especially if you're easily motivated by goals. Reaching the first $500 in your savings account might encourage you to save more aggressively.
Earn extra income: Consider strategies to get more money, such as starting a side hustle. (add some text)
Celebrate your success: If you’re sticking with your savings habit, don’t miss the opportunity to recognize what you’ve accomplished. Find a few ways that you can treat yourself, and if you’ve reached your goal, set your next one.
Importance of emergency funds
Compared to other savings strategies, you don’t need to earn a certain amount of interest on the money you set aside in an emergency fund. The mere act of conserving money can give major financial benefits.
Everyone should think about having emergency reserves as a safety net for their finances. They are essential in preserving both financial security and mental tranquility. The following are some reasons why emergency funds are important:
1) Helping you make better financial decisions: Having an emergency fund makes it simpler to deal with unforeseen costs. You may be more prone to accept high-interest rates and other unfavorable terms if you're under pressure to figure out how to pay. However, if you have an emergency fund, you'll be able to consider your options and come to a wise choice.
2) Financing an unexpected job loss: Your emergency fund can help you pay your bills if a situation like a job loss means you won't receive a paycheck for a while.
3) Providing peace of mind: Knowing you have money available can make you feel more prepared to deal with an unforeseen financial challenge. Even if you never use your emergency fund, it might provide you with a sense of financial security.
4) Keeping you out of debt:: An emergency fund will assist you in avoiding using your credit card or taking out a loan to pay an unforeseen bill.
5) Opportunity Seizing: Having an emergency fund offers you the flexibility to seize unexpected opportunities or make important life decisions without being hampered by financial constraints. This might include investing in education, starting a business, or taking advantage of a career-changing opportunity.
6) Debt Prevention: Without an emergency fund, people often turn to credit cards or loans to cover unexpected expenses. This can lead to the accumulation of debt with high interest rates, making it challenging to regain financial stability.
7) Financial Security: An emergency fund acts as a financial safety net, providing a sense of security and peace of mind. It assures you that you can handle unexpected financial setbacks without severe consequences.
Bottom Line: Why You Need Emergency Funds
Having an emergency fund can give you financial security, debt relief, and the ability to steadily increase your savings over time. Emergency funds initially appear to be just another piece of investment or financial jargon.
A well-funded emergency fund ensures that you can weather life's storms without jeopardizing your financial security. So begin today, commit to establishing your emergency fund, and take a huge step toward financial security.
Set a specific savings goal, construct a budget, and commit to putting aside a percentage of your salary on a regular basis. Remember that financial security is within your grasp, and your emergency fund is the key to gaining access to it. Take the first step toward protecting your financial future today, and enjoy the peace of mind that comes with knowing you're ready for life's unforeseen obstacles. Your future self will appreciate it.
Works Cited:
Catherine Phillips Montalto.(2004,january). Research gate: Emergency funds and alternative forms of saving, https://www.researchgate.net/publication/268424813_Emergency_funds_and_alternative_forms_of_saving
Best places to keep your emergency fund – forbes advisor.(2022,september7)https://www.forbes.com/advisor/banking/best-places-to-keep-your-emergency-fund/
Investopedia: Emergency fund.(2022,february 9)https://www.forbes.com/advisor/banking/best-places-to-keep-your-emergency-fund/
