An emergency fund provides individuals with a financial safety net during times of sudden expenses or income fluctuations, or when unexpected income and expenses arise. Without such funds in place, people often resort to high-interest credit card debt or borrowing money from friends and family instead of saving up an emergency fund.
Establishing an emergency fund takes discipline, but the effort can pay dividends when faced with what happens without one. Here are six compelling arguments why you should establish one:
1. Job loss
Imagine losing your job is unthinkable, yet having an emergency fund can provide essential relief from unexpected expenses like leaky faucets or overflowing toilets. It allows you to avoid debt or turning to credit for unexpected expenses like these and can provide much-needed peace of mind when unexpected costs arise.
Make it your goal to save three to six months’ worth of living expenses, which may seem ambitious at first. But you can achieve it by setting an aggressive savings goal, paying down debt, and finding ways to cut expenses. Automate your savings for even easier saving – just remember to periodically review progress and adjust plans as circumstances change (for instance if your job increases income, increase savings contributions accordingly).
2. Medical bills
An emergency fund can provide relief when insurance doesn’t. It can cover expenses like school activities for your children, technology needs (like replacing an obsolete cell phone or laptop), travel to visit sick family members and even cover travel costs to get there in time.
Without an emergency savings account, unexpected expenses may force you to use credit cards or take out personal loans; leaving behind debt and interest payments that will need to be made later on.
At its core, your emergency fund should contain enough savings to cover three months of expenses. To create such an emergency fund, start by creating a budget and paying down debt, then set aside money each month in a risk-free savings account or prepaid card.
3. Home repairs
An emergency savings account can help protect against costly home repairs, such as burst pipes or overflowing toilets, which can quickly add up. Without preparation, these expenses could cost thousands.
Instead of turning to credit cards as a solution for home repair emergencies, it may be more prudent to set aside money specifically for this purpose and save accordingly. That way, when any unexpected costs arise that require urgent repair work you won’t incur interest charges or late fees.
Financial experts suggest having at least three to six months’ living expenses saved in an emergency savings account. Every situation differs; for example, if you still owe debts you may need to set aside less. Review your budget regularly and increase savings as needed.
4. Car repairs
Although paying down debt should take priority over saving, you should still put aside money in case of emergencies. Most experts advise setting aside enough funds for three to six months’ expenses in an emergency fund.
An emergency fund can help protect against incurring costly credit-card debt when something breaks, like when your car or other appliance breaks down or your laptop crashes due to coffee spillage. Furthermore, having one will give you peace of mind in case unexpected veterinary care or home repairs become necessary. If finding money is an issue for you, remember that “one man’s trash is another man’s treasure”, by clearing out your garage or basement of items to sell – these could include tax refunds, bonuses or commission checks!
5. Unexpected expenses
When unexpected expenses arise, having money saved up can be critical. From flat tires to job loss, unexpected costs may be difficult or impossible to predict and using credit can quickly turn into debt. Establishing an emergency fund gives you peace of mind that any financial surprises in life won’t throw a curveball your way.
Start building an emergency fund quickly by cutting discretionary spending and reviewing subscriptions; such as streaming services, gym memberships or shopping sites where payments are being made regularly. Consider canceling any subscriptions in order to free up money for savings accounts with lower fees and yields – this should make saving easier and faster!