As the name implies, an emergency fund is used for unforeseen emergencies that would be costly if not addressed quickly. Therefore, it is critical to have something to fall back on. As a result, emergency funds (savings) may be seen as financial assistance to turn to when there is a primary or unpleasant financial crisis that arises unexpectedly and needs quick attention or management. A form of savings account that you accumulate over time rather than one that you may use at any moment. 

What this blog covers:

  • Importance of Emergency Funds 
  • How much do you need in your emergency fund to start?
  • How to set up your emergency savings 

Emergency savings aim to have a quickly available pool of money to pay unforeseen needs without having to rely on loans, debts, or credit cards. 

Here are some reasons why having an emergency fund is essential:

Financial Security:

Creating an emergency fund is an important step towards financial stability. This fund acts as a safety net for people and families, protecting them from potential financial difficulties caused by unanticipated and unexpected bills and helping people prepare for unexpected financial challenges, including job loss, medical concerns, and home repairs. The emergency fund is a prudent financial strategy that delivers a sense of security while also promoting financial stability.

Ease of mind:

Having emergency funds can be a valuable asset that provides peace of mind, especially during financial difficulties. When you have a safety net in place, you can make informed decisions without the burden of external pressure, allowing you to invest wisely and make clear-headed choices. Emergency funds can also serve as a “stress reduction agent” by eliminating the need to seek costly loans with high interest rates. With a sense of security, you can focus on building a stable financial future.

Protecting Impulse Selling of properties:

During trying times like this, you might want to consider selling and liquidating your assets, such as homes and investments, that have accumulated over time. However, such a course of action may not be financially ideal, and there may be other ways that provide more long-term advantages. There are financial services that help customers evaluate their alternatives and choose the best course of action, with the goal of minimising loss and maximising rewards. So, having an emergency fund helps you to think about considering other options before impulsively selling your properties. 

Financial Discipline:

Sometimes, when you have money sitting in your bank account without a clear plan for it, it can be tempting to spend it on things that aren’t really important. However, setting up an emergency fund can help you avoid impulsive spending and cultivate constructive financial habits that promote a healthy and secure lifestyle.

Helps To Avoid making the wrong family decisions

It’s important to avoid making the wrong decisions with regard to family finances. Some family members may be tempted to ask you to lend them money without carefully considering the repayment options and the potential consequences. However, having an emergency fund can help you avoid these situations by providing a safety net for unexpected expenses. Before deciding to borrow other’s money, it’s important to verify the information provided to you and make sure that they will be able to pay you back as agreed.

Avoiding Debt:

The establishment of an emergency fund can serve as a valuable tool in mitigating the accumulation of debt, as it reduces the likelihood of resorting to high-interest loans or credit cards to cover unexpected expenses. By maintaining a reserve fund, individuals are better equipped to handle unforeseen financial obligations without incurring additional debt. This approach to financial management can provide individuals with a sense of security and stability, allowing them to address potential financial challenges with greater confidence and ease proactively.

Medical Emergencies:

Adequately funding an emergency account can alleviate the anxiety associated with unforeseen medical expenses. Statistics from Healthcare.gov indicate that the cost of a three-day hospital stay averages around $30,000. Therefore, it will help you if you have a sound financial plan in place to mitigate the financial burden of medical emergencies.

Job Loss:

In the event of job loss, having an emergency fund can provide a financial safety net. It can help you maintain financial stability while you search for new employment. For instance, the coronavirus pandemic resulted in over 28.5 million job losses, as reported by CNN. This is in contrast to the Great Recession of 2008, during which Americans lost 8.7 million jobs.

Car or home repairs:

If you face unexpected repairs for your car or home, it’s always better to tap into your emergency fund instead of taking high-interest loans. This will help you preserve your long-term financial health. 

Flexibility: Additionally, having an emergency fund also provides flexibility in your financial planning. It allows you to take advantage of opportunities or make decisions that might be financially challenging otherwise, such as pursuing further education or changing careers.

How much do you need to put in your emergency funds?

Determining the right amount for your emergency fund is critical to ensuring financial stability in times of unforeseen circumstances. The top global advisory suggests having an emergency fund that can cover six months of living expenses, which is the minimum amount you should aim for

While some banks and financial experts recommend saving at least three months’ worth of salary in your emergency fund, it is important to realise that this amount may only be sufficient for some. Depending on your income and priorities, you may need to save more.

For instance, if your monthly living expenses are $200,000, you should aim to have an emergency fund of $1,200,000 that can cover six months of expenses. To build this fund, you must save $50,000 every month for two years. Remember, the purpose of emergency funds is to avoid debt and loans, so it is crucial to find a plan that works for you and stay consistent with it.

Investing a Portion:

Consider diversifying a portion of your emergency fund into low-risk investments. While the majority should remain easily accessible, this strategy aims to generate additional returns over time.

How do I build an emergency fund?

“How can I create an emergency fund?” is a topic that we will be covering in our upcoming blog post. To stay informed, we suggest subscribing to our blog. If you have any other concerns or questions about emergency funds, please feel free to leave them in the comments section. Our team will be happy to research and provide answers for you.