Life is unpredictable, and we may never know when we will be stuck in a dilemma where we need some extra money to get by. The Covid-19 pandemic was definitely an eye-opener for people on that front. When companies were downsizing left, right, and center, the need to dig into savings rose considerably.
For many people, an emergency fund came in handy in this situation. Since they had prepared for an unpredictable time, they were able to sail through their expenses until they had acquired a new job. Unfortunately, the same cannot be said for the other half, who struggled financially and ran out of savings well before finding employment again.
Let’s get into a little more detail about what an emergency fund is and why you need it.
What is an Emergency Fund?
As the name suggests, an emergency fund is for unforeseen circumstances and provides you with a safety net for a difficult time in your life. It doesn’t necessarily have to be unemployment. It covers different types of emergencies, for instance, dental emergencies, car trouble, and unplanned travel expenses.
Why Do You Need an Emergency Fund?
There are multiple reasons to start an emergency fund. Here are a few:
Provides Financial Safety
As mentioned earlier, an emergency can arise at any time. Hence, it is essential to be ready for it. Your regular savings may not be enough to provide you with enough financial safety for your situation.
An emergency fund ensures you have the financial security you need and provides you with a cover to continue spending money without stressing out about your expenses. Furthermore, it gives you the confidence to spend money where needed because you know you have a safety net in case of an emergency.
Keeps You From Using Your Savings
If you do budgeting, you most definitely have some savings set aside. However, this does not mean you don’t require an emergency fund. You see, these savings are probably not enough to take care of your expenses in case you lose your job. Ideally, an individual should have about three months’ worth of salary saved in their emergency fund to get by in case of unemployment. This way, you will be able to spend on your necessary regular expenses without digging into your small savings.
Saving for a Goal
An emergency fund is an excellent way to save for a goal. Of course, when you have savings at home, you naturally take out some money in case your expenses increase, or you need something urgently. This causes a dent in your pocket, and you go a step further from your saving goal.
Hence, having an emergency fund safely tucked away ensures that you are not spending from it and can save enough for your goal. You could be saving for anything but the fund will help stop spending on a whim which makes it challenging to save a sufficient amount.
Protects from Bad Financial Decisions
We have all caused a dent in our wallets once or twice in our lives. No matter how hard you try to prevent it from happening, sometimes we end up making bad financial decisions. An emergency fund can help in such a situation as well.
Suppose you invested in something that had an unfavorable outcome, or perhaps you went through a significant loss in your business. Imagine what a blessing an emergency fund can be in this situation. It provides you with financial safety and ensures that you are not stranded in life in case any crisis arises.
No Need to Rely on Loans
In case of emergency, what do Americans usually do? They take out loans. According to Lending Tree statistics, 20.4 million Americans have taken out personal loans since the first quarter of 2022. However, paying back the loan is no easy feat. A hefty loan adds to your debt, and you have to return more than the specific amount you borrowed because of interest.
However, your emergency fund is your own. There is no need to return the amount, and there is no interest involved. You can easily save this money and use it when needed without having to worry about returning it. This also makes you more financially independent and confident in handling your money. In fact, not having to rely on loans is a privilege that an emergency fund can make possible.
Where to Keep Your Emergency Fund?
Remember, you need quick access to your money. Hence, a saving account in the bank of your choice is where you can keep your emergency fund. It would not be wise to keep a long-term investment fund because a crisis can strike anytime, and you need to get your hands on the money fast.
Furthermore, it is essential to keep your money separate from your regular account so that you don’t end up accidentally using your emergency fund.
Additionally, a savings account also yields a good amount of interest which means you are making your money work for you while keeping it safe in the account. Also, a high-yield savings account is another good option to keep an emergency fund since these accounts are federally insured, making them safe while also providing quick access.
The Final Word
An emergency fund is the best decision you can make for yourself. It provides you significant financial safety for your bad times and ensures you remain worry-free. Having an emergency fund means you need not worry about unfavorable circumstances that may bring financial constraints along with it.
In fact, the pandemic taught us well in this regard. Of course, we may never know when something similar may strike again. Hence, it is crucial to be prepared in advance and keep some extra funds aside from your savings so you won’t have to stress about your spending in case you lose your job or have a sudden medical emergency. Moreover, it is an excellent option if you do not want to borrow money from lenders.
