Why You Need an Emergency Fund

Emergencies are ineluctable in life. Even with the best thought out financial plan, you will find yourself at one point or the other dealing with unexpected emergencies. Over the last one decade, research from the U.S Bureau of Statistics (BLS) shows that the level of income for Americans is rising but so is the cost of living. This means your current income might not be available to cover finical emergencies.

Turning to your bank or credit union will not work because these institutions are now wary of giving our personal loans. If you qualify for such a loan, it might take weeks before approval. This means your financial emergency will have festered into a full blown disaster.

In the current tight economic environment, it follows that most Americans don’t have sustainable income to take care of emergencies. A survey by the American Savings Education Council and Consumer Federation of America shows that 75% of Americans don’t have sufficient savings to deal with emergencies.

An emergency fund comes in handy for unplanned and unexpected expenses. As a homeowner, you appreciate how devastating unforeseen expenses can be for the family. This is a fund that is specifically meant for a rainy day.

In case you don’t have an emergency fund, the most obvious route is to rely on credit cards and this will be the start of your journey to financial ruin. In extreme cases, household owners are forced to tap into their retirement savings, which is a risky move.

According to financial experts, an emergency fund should be enough to cover 3 to 6 months of living expenses. Such money should not be invested in risky options such as stocks but should be kept in a safe liquid account.

Situations Warranting an Emergency Fund

Take, for instance, a situation where you need quick cash due to a medical emergency. Waiting for your bank to come to your rescue is not the best move in this situation. There are many situations where an emergency fund comes in handy. While some might look unlikely, remember life is full of nasty surprises.

One minute you might be on top of your finances and the next you don’t know how to save your home. Take a look at emergency situations that any household owner should be prepared for:

  • Major health expenses – If you don’t have coverage or your policy is insufficient to cover major surgery, you have to think of the deductible and co-payments.
  • Job loss – No job is secure and you need a huge reserve in case you find yourself without a pay check to look forward to.
  • Car and home repairs – Your home and car are important and in case of renovations or repairs, you need to have the money to get it done immediately. Delaying auto or home repairs just increases the cost.
  • Unanticipated travel – However much you plan not to travel, you might be forced to do so, especially due to family obligations. Flying for your relative’s burial is something you cannot avoid.

There are many other situations where an emergency fund will ease the pressure. Many families have been devastated by such emergencies and it is advisable to avoid such an eventuality by building an emergency fund for a rainy day.

More Reasons to Build an Emergency Fund

While an emergency fund is not the first thing that comes to mind when reorganizing your finances, analysts say it will greatly improve your life if you prioritize it. Of course, no one looks forward to an emergency in their lives, but this is all the more reason why you should always be prepared for it.

If you are not anticipation an unforeseen financial expense and you have no plan to take care of it, this is a recipe for financial disaster. Below are some more reasons why you should reconsider including an emergency fund in your list of expenses:

  1. Peace Of Mind. Most homeowners live in trepidation and this is because they know things can go wrong any time. In most cases, things actually go wrong; your car breaks down or a family member passes. Living this way is stressful and you can avoid it by simply saving some money in a separate account in case of such an emergency. You can focus better on your life and this in turn leads to more productivity.
  2. Controlling Your Spending. If you have a separate account for your emergency fund, it means your spending whims are minimized. Compare this to having some money in your debit card. Any time you walk into a store, there will always be something extra worth buying. When disaster strikes, that beautiful fur jacket will not help you. For this reason you need an emergency fund that is separate from the rest of your money.
  3. Family and Property Protection. Some situations always seem to affect others but that’s until you find yourself there. For instance, if you are involved an accident and your vehicle is in the wrong, your insurance will still pay for the damage but you can bet a large amount of the deductible will dent your savings. An emergency fund comes in handy to sort this out. There are many other situations where quick access to cash comes in handy; for example, if your teenage son or daughter is involved in a DUI and you need to hire a lawyer quickly. All these are situations no one would like to be in but they do happen to others meaning they can also happen to you.
  4. Avoiding Poor Financial Decisions. Your car has broken down and you need to get it back on the road as quickly as possible. What do you do? If you are like most folks, you will just go to your garage and pay using your card. That is a poor financial decision because you just dug yourself into more debt. If you had an emergency fund, you wouldn’t have to contend with high interest rates, penalties and other fees associated with your credit card debt.

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Even the most stable financial situation can collapse into a heap due to financial emergencies. There are thousands of families that have gradually sunk into poverty and all this started with a single unforeseen expense. These situations can ruin your financial situation in no time. However, you can easily avoid such stress and avert financial ruin by building and maintaining an emergency fund.

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