Imagine you are living your life peacefully with your family. You work hard all day to spend all the money on luxuries and unnecessary liabilities without bothering with savings. Yes, it will give you those temporary sparks of happiness, and You will think you have it all under control.
But what if any unavoidable circumstance occurs or all of a sudden, the world gets affected by another pandemic, or you may lose your job? Whatever the reason, you should have an Emergency fund.
What Is An ‘Emergency Fund’?
Do you know how little kids have a piggy bank where they keep putting some money, and when they need it, they just break it open? That’s how an emergency fund works.
An emergency fund is basically a savings account that is kept separate for unexpected financial emergency situations. You create an account and dedicate a part of your salary to that fund. Now, in case of any unforeseen financial crisis, you don’t need to panic. You have a plan ready.
Imagine what happens otherwise? Any disaster comes and throws you off; it won’t just affect you but all the lives connected to you, your parents, your spouse, and even your kids. You wouldn’t want that, right?
In the beginning, when you create an emergency fund, it might seem overwhelming, and you would want to quit. But in the long run, you’ll realize it was all worth it. With that said, the next question is how much emergency fund you need.
How much emergency fund do you need?
Well, it’s best to have living expenses of six months saved for yourself. But if you manage to save for at least 3 months, that’s good enough too.
Don’t get worried thinking about the big amount; just start fixing small goals and take smaller steps towards them. You can do it by cutting back on your expenses. Make a budget sheet, and you’ll see so many areas where you can reduce the expense.
While saving for an emergency fund, it’s important to keep in mind what can be potential emergency situations. Only then you will be able to prepare accordingly.
What Your Emergency Fund Is Really For
- To cover living expenses After losing a job or being laid off.
- Major car repairs after an accident.
- Emergency home repairs.
- Emergency, necessary medical expenses.
- Unexpected, essential travel.
9 Reasons Why Emergency Fund Should Be Your Top Priority
Below are the reasons Why Should Creating An Emergency Fund Be a Top Priority:
- Creating an emergency fund provides you with a safety net when times get tough.
- You will save more money in the future because you are not going with a high-interest loan or using a high APR credit card.
- You can use the money for a kid’s school if you don’t have any money saved for it. You can afford to invest kids gets into a great but expensive school.
- Let’s say you face an unforeseen financial emergency, and you have already prepared yourself for it. You have an emergency fund, and your mind is ready to face it. You won’t panic, and you won’t make bad decisions in a rush.
- An emergency fund is like an emergency exit in your house. You do build one in case you encounter an emergency situation such as a gas leak or fire. It is not necessary that you will experience such an emergency, but you don’t skip on creating the exit. Similarly, in life, you need an emergency fund in case of financial emergencies. It will help you get out of the situation without hurting yourself.
- If you don’t create an emergency fund, you might have to go for other options in a crisis. You have to arrange money no matter what. And you don’t have it, so the only option is to ask for help which will leave you in debt. Then, you’ll spend the rest of your life paying off that debt.
- Other than a loan, you have the option of selling off your possessions, such as your house. But where would you go then without a house? Therefore, the best plan is to create an emergency fund now to save yourself from future problems.
- An emergency fund will also save you from interest. If you borrow from someone in an emergency situation, you will have to return it back with interest. It can take a whole lifetime to clear the money. Now, you don’t want your kids to suffer because of this, do you?
- An emergency fund is essentially money that’s been set aside to cover life’s unexpected events. The money will allow you to live for a few months should you happen to lose your job or pay for something unexpected that comes up without going into debt. Think of it as an insurance policy.
What if you don’t save money for an Emergency fund
You’ll start realizing all that worthless unnecessary spending could have been saved for this day. What if I tell you it happens with every other person? Yes, it’s true; 64% of Americans don’t even have $1000 saved in their accounts for emergencies.
But you don’t have to be one of these people. No one ever taught them about financial planning, but you can learn it now. In fact, we have enlisted all the reasons why creating an emergency fund should be your top priority. Before jumping to that, let’s see what is exactly meant by ’emergency fund.’
Why Is Emergency Fund So Important?
The reason why you have never considered creating an emergency fund is that no one ever taught you about it. We teach our kids about science and arts but not basic skills to be well-prepared in life.
In the USA, more than 21% of the citizens don’t have an emergency fund. That’s exactly why most people could not handle the recent global pandemic caused by Coronavirus.
Recall the financial hardships faced by all the families who had no emergency fund prepared. Shouldn’t we all learn from it and start getting prepared for the unexpected?
An emergency fund is like a safety net for you. It will protect you and your family from any hazardous situation that may occur. So, ask yourself why it is important to prepare a safety net.
Just imagine such a situation arises, and you have a whole plan as well as an emergency fund ready. You don’t have to rely on your credit card or ask someone for help. Your future self will thank you for this pre-planning and for saving them from storms.
Why don’t I need an emergency fund?
Mostly everyone needs an emergency fund because this will provide you cushion and act fast in an emergency situation. But few expert and financial planner says if your income is much more than your expenses, then you don’t need an emergency fund. If you’re in this position and you have investments in a taxable portfolio, you can withdraw from that account in case of emergencies.
Why is it important to have 3 to 6 months’ salary saved for an emergency fund?
The purpose of an emergency fund is to protect you from worst-case scenarios, such as losing your job, and until you find a new job, you should not be under stress. It may take 3 to 6 months to get a new job, so you should have three to six months’ salary in your emergency fund to cover your expenses.
Is it enough to have a $1000 emergency fund?
If you’re just starting out and you want to build up your emergency fund, it can be hard to know how much you should actually have. For example,
If you’re living in a city, for example, where the average rent is $1200 per month, then you’ll need more than a $1000 emergency fund to cover one month’s expenses.
The amount goes more if you have a car payment that costs $200 per month and/or student loans that cost $100 per month.
So best case is to calculate your monthly expense and have an emergency fund worth 3 to 6 months of expenses.
When should you use your emergency fund?
When you really get an emergency like losing your job, medical, or any unforeseen critical issues.
Where Are the Best Places to Keep an Emergency Fund?
You should keep your emergency fund separate from your other bank accounts or use envelopes for it. Here are some high-saving options where you can Keep your Emergency Fund
- Savings account with high-interest rates. E.g., discover a saving account.
- Money Market Account.
- Certificate of Deposit.
- Roth Individual Retirement Account.
With all that said, you need to make a smart move and start thinking about creating an emergency fund for yourself. And make it your top priority instead of spending money on useless things that won’t even matter in the future. Wouldn’t all the happiness turn into regret in any circumstance? It’s on you to create a safety net for your future self and your family they will thank you later.