Ever heard of the saying, ”failing to plan is planning to fail”? That statement rings true for many aspects of our lives, including our finances. When an emergency strikes, it usually involves your money.
Car repairs, medical procedures, and unemployment – are events that are often out of our control. And when these occur, they can cause a major financial burden. That’s why it’s crucial to prepare for unexpected expenses by having an emergency fund.
What Is An Emergency Fund?
An emergency fund pertains to a bank account containing money that is set aside for unexpected expenses. It acts as a financial safety net when life decides to throw its curve balls at you. The amount varies per individual as it is based on one’s living expenses. As a rule of thumb, an emergency fund must cover at least three to six months of your living expenses.
What Counts As An Emergency?
The definition of “emergency” varies from person to person. But if you haven’t clearly defined what it means to you, here’s how you can tell if your situation is an emergency. First, it must be unexpected.
Emergencies can come up at any time – whether you’re at work, on a vacation, or while you’re on your sofa watching your favourite show. An example of this is unexpectedly losing your job. If you live from paycheck to paycheck without an emergency fund, how would you go about paying your household bills?
A major characteristic of an emergency is that it is unavoidable. That means that when not acted upon, it can result in serious consequences. A major medical procedure, for instance, can be considered an unavoidable emergency.
Lastly, an emergency is usually urgent. When you find out that your toilet system is blocked, you might have to immediately call for repair services. These are events that count as emergencies. What does not count are lavish holidays, frequent gadget upgrades, and other unnecessary purchases.
Why Is An Emergency Fund Important?
If you haven’t been allocating any of your hard-earned cash to your emergency fund, you’d be setting up yourself for some trouble. To prevent yourself from going down this route, it’s important to know why keeping that emergency stash of money is essential. Here’s why it’s necessary for everyone to have one:
1. Unexpected Medical Expenses
Having medical insurance doesn’t guarantee that you won’t pay any fees out-of-pocket. On top of that, some procedures may not even be covered by your insurance. When a medical emergency arises, your first priority must be taking care of yourself, not the amount of money you have to shell out for hospital expenses. That’s why having an emergency fund is essential, especially because these events aren’t always completely in our control.
2. Curbs Impulsive Spending
There are reasons why an emergency fund should be left in a bank account that is out of immediate reach. Primarily, it can help curb any impulsive spending habits you may have.
Whether that be buying a shiny new gadget or designer bag, it’s not wise to spend huge amounts of money on non-essentials when you haven’t properly built your emergency fund. Learn how to manage your personal finances with proper budgeting to prevent last-minute spending.
It’s crucial to have your emergency fund in a separate account from your savings because you might subconsciously be spending money that could be used for rainy days. And when you deplete your funds, that could spell trouble for you during times of emergencies – you might end up taking on debt, which just aggravates your financial situation.
3. Prevents You From Going Into Debt
One word that no one likes hearing is “debt”, especially when it describes your financial situation. Building your rainy-day fund prevents you from falling into the trap of debt. With so many ways to access cash such as your credit card or other loans, it’s easy to borrow money for urgent matters you need to attend to. These, however, are often of high interest.
4. Acts As A Safety Net During Job Loss
Especially for those with their job as their main source of income, having an emergency fund should be your top priority. The truth is, you can never be one hundred percent certain that you can keep your job. People can lose their jobs unexpectedly, and not having that emergency stash of money can add to your growing list of problems.
In case this worst-case scenario comes to fruition, having an emergency fund can help you plan the next step in your career. Without this safety net, you might accept a job offer out of desperation – even if it’s not the right move for you.
5. Provides Peace Of Mind
Lastly, having an emergency fund gives you peace of mind. When you’ve allocated six months’ worth of your living expenses to your fund, you have more breathing room for other expenses you may have.
Whether that be going out for the holidays or starting your own business venture, having some spending leeway makes your life much more comfortable. In addition to that, your clearer mind will help you make more sound decisions simply because you’re not on a tight budget.
Life happens – emergencies can come up at the most inopportune time. The best way to protect yourself from life’s surprises? Have your own emergency fund. Your wallet will thank you.
Also, read: Pay Off Debts Quickly Using These Effective Tactics Starting Today
Author: Allan Bangirana
Allan Bangirana has a taste for all kinds of topics and usually writes about tech, entertainment, sports and community projects that make a difference in society.
He writes for Newslibre and Spur Magazine. He is also the co-founder of the Innovware project and a freelance consultant passionate about technology and web.