An emergency fund is an integral part of any sound financial wellness plan. That’s because, whether we like it or not, emergencies happen. It’s in your best interest to be prepared for emergencies so that they don’t throw you off balance after catching you off guard. If you need some convincing, here are five reasons you should have an emergency fund.
Life is unexpected. You may think that it is unlikely that an emergency will happen to you – like, what are the chances that your house will burn down or your car will totaled by an uninsured motorist? However when you consider how even small things like engine troubles or missing work due to sickness can put you in a state of economic uncertainty, it’s not hard to see that “emergencies” can happen every day.
The costly alternatives. Without an emergency fund, you are likely to resort to high-interest rate alternatives, such as payday advance loans, credit card advances and personal loans. These can cost you big in the long run.
Financial responsibility. Saving an emergency fund requires that you put time and effort into making a budget, and that you express diligence, discipline and commitment toward accomplishing your goal. These qualities contribute to your overall financial well-being, and encourage better, more conscientious life management habits.
Asset preservation. When emergencies arise, it is not uncommon for people to tap into their retirement plans, home equity, and investment accounts. Although the intention may be to eventually build these assets back up, that rarely happens.
Interest. Emergency funds can actually accrue money! That’s right, when you set up your fund in an interest-bearing savings account, you make your money work for you – even when you’re busy not having an emergency.
Now that you understand the importance of an emergency fund, you may be asking how much you should be setting aside for in the case of an unfortunate event. As the most common use of emergency fund money results from termination of employment, it is a good idea to set aside three to six month’s worth of living expenses (the more, the better). Of course, you can make adjustments according to your circumstances in order to determine a savings amount that is best suited for you. For example, if you are single, childless, and relatively debt-free, then you can get away with less of an emergency savings than someone supporting a family of five, two car payments, and a huge mortgage.
Whatever you decide is best for you, it will take some time to save, so start now.
About the Author: Deborah Blair is a professional writer who is dedicated to personal finance. She enjoys writing about the importance of savings and emergency funds and also enjoys writing about bad credit loans and credit repair.