Why You Should Have Emergency Fund
What is emergency fund?
Emergency Fund is the money you set aside in an account to meet your unexpected expenses. The money is usually kept in savings account or in any form of liquid investment which can be easily turned into cash immediately. Financial emergency which are different from your normal or regular expenses can occur at any time. While it is called financial emergency is that such expenses do occur when you least expect or prepare for them. They are situations of life which may be inevitable in human life. They don’t have any regard to your financial status. When it happens, it needs to be addressed almost immediately. One can easily budget for regular expenses but when it comes to financial emergency, contrary is the case.
While you can easily estimate your regular expenses such as rent, utility bills and cost of feeding, you may not be able to do that for emergency situations. The truth is that, you can’t easily predict when emergency situation will happen and the amount of money it will require. If you don’t have emergency fund in place for these sorts of unexpected expenses, your finance can be destabilized when they occur; the amount of cash you have at hand notwithstanding. Therefore, it is very important that everyone has an emergency fund. If you don’t have one yet, it is high time you opened a savings account for this purpose and started putting money into it on a regular basis. If you don’t know how to go about this, I will guide you on how to make it happen. If you follow the steps below, you will soon be surprised at how much you have stashed in your emergency fund.
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Decide: This is the starting point. You need to decide to open the emergency fund. Do you know that some people can actually afford to have a home of their own? But because they never took any decision about it, it never occurred to them to buy one. The same applies to the issue of seeing the need to have an emergency fund. Once you’ve made a decision about any matter, you start working towards it. I am happy that you are reading this article. If you have never thought about having an emergency fund before, may be this article will ginger you up.
Open a saving account: The proof that you have decided to have an emergency fund is to go straight and open a savings account. It is just like a normal savings account. However, you can ask your banker if there is any special account that you can use for that purpose. Whatever the account is called, what is important is for you is to know that it is an emergency fund. That is, you will not spend the money on regular expenses. I like to repeat it again, you need to go and open the savings account straight way. Don’t procrastinate. This is not the time for any excuse. This is not the time to start asking yourself about how you will fund the account. The truth is that, when there is a will, there will always be a way. If you ask from people that went to college or university, they will tell you that that they didn’t go to school because they had too much money. Some of them didn’t have the money. But just because they determined to further their education, they got enrolled into the school. Before they knew it, they have already become graduates. I just sighted that as an example.
Before I proceed on the next step you need to take, it is important to mention that emergency fund is not the type of fund you invest in stock market. Emergency fund should be kept where you know it is safe. It should be readily accessible anytime you need it. You may be tempted to put the money in stock market. The danger there is that stock market is volatile. The value of your emergency fund may have diminished when you need it as a result of the drop in stock prices. Nevertheless, as your emergency fund begins to grow, you can invest part of it so as to retain or increase the value of the amount in the account. What I mean here is that, emergency fund tends to diminish in value over time as a result of inflation. But if you invest part of it in an asset that yields higher returns than inflation rate, you will be able to sustain the value of your emergency fund to certain extent. But you can only do this when you have saved substantial amount in your emergency fund.
Begin to save: Is that simple? Where will the money come from? I expect such questions. Remember I mentioned that, when there is a will, there will be a way. To start saving, you need to first look inward before you start looking outside. How much do you earn every month presently? What make up your monthly bills? List them out and analyze them based on their level of importance or necessity. Are there anything you can do away with for now? You can eliminate them from your list. If you cannot eliminate them completely, may be you can reduce the amount you spend on them. This should translate into savings for you. Instead of spending the money on other items, you should save the money in your emergency fund. Other money you can save in your emergency fund include tax refunds and gifts.
But for people that have balances they are still paying in high interest loans or credit cards, it may be more appropriate to quickly pay them off. This will help you save some interest expenses. Nevertheless, that does not mean you should abandon your emergency fund. You can find a way of making extra income. You can start throwing part of the extra income you make into the emergency fund while you use the other portion to reduce your loans or credit card balances.
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How much emergency fund is enough?
I can’t say that you should save certain amount in your emergency fund. The amount you will need to save in your emergency may vary from individuals. What will be enough for you may not be enough for another person. Your lifestyle may contribute to the factors that you need to consider. But as a benchmark, it is always good to have amount that can adequately take care of your three months expenses as minimum. Once you have this amount in your emergency fund, you can increase it to cover six months expenses and later increase it to cover your twelve months expenses. At this level, you can start considering investing part of the emergency fund since it is unlikely to have emergency situation that will require that you spend the entire amount in the account at once.
Why emergency fund?
You may want to know why you need to stack money in an emergency fund. If you don’t know the reasons, you may not be motivated to take appropriate steps. Below are the reasons why you may need emergency fund:
Job loss: In this uncertain world, there is no longer any job security anywhere. Anything can happen in your working place that may require that you will be relieved of your job. That does not mean you don’t know what you are doing. The organization where you work may suffer revenue loss which may force it to start cutting costs. When such happens, staff rationalization may be the first step the organization will take. Even if you have your own business, you may lose your major client and this may take a toll on your income. I remember that this happened to me in a particular year. My two major clients that had outsourced jobs to me decided to have their own in-house staff. It was really like a disaster! So, you can suffer job loss any time. But if you have enough money in your emergency fund, you may not feel the pain as such or the impact may not be that much on your finance. Your emergency fund will be there to support you during the time you don’t have money coming in.
Medical Bills: This is different from your routine medical expenses. If you suddenly get ill and you have to pay the bills out of your pocket, medical bills can be overwhelming. But if you have enough amount in your emergency fund, you can easily offset the medical bills from there. However, this will lower the amount you have in the emergency fund. You need to start building up the account again to a reasonable level.
Investment Protection: If you don’t have emergency fund, you can be forced to sell your investment when it makes no economic sense. For example, if you invested in stocks, there may be a temporary fall in the prices of the stocks. During financial emergency, you may not have other option than to quickly sell the stocks at a loss so that you can quickly meet your pressing needs.
Unscheduled Trips: You may have course to travel when you least prepare for it. Apart from the flight tickets, you may also need to pay for hotel accommodation and feeding. Your emergency fund will help in such instance. Please note that unscheduled trips are different from your vacation trips. Before you go on any vacation, you must have been planning for it. So, it cannot be regarded as unexpected expenses. It is not advisable to deep your hand into your emergency fund to pay for vacation expenses.
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Car Repairs: I want to believe that you understand that your auto insurance does not cover your car repairs. If you are involved in an accident, you may need to pay for your car insurance except you have comprehensive or collision insurance. Even with your comprehensive insurance, you will still need to pay your deductible. If you set your deductible too high, the cost may be much for you to pay as a single payment. In this period, you can easily tap into your emergency fund.
Other Repairs: There may be other purchases or repairs which you didn’t plan for that you may carry on on your properties. If you suddenly lose your laptop, definitely you will need another one. Your home may be leaking and you need to quickly fix it. All these require money. Since you don’t plan for such expenses, you may need to draw from your emergency fund.