Last Updated on October 24, 2020 by Yetunde Akindele
Life can be very unpredictable. No one wishes to be thrown into a bad situation. However, finding yourself at a point where you have no money but desperately need some is something many of us could go through. That’s why you need to be financially prepared so you can handle situations like these easily. Having an emergency fund is one of the most important parts of such a preparation. This is what has led me to come up with 12 reasons why you need to have an emergency fund written in this article.
Simply defined, an emergency fund is a pile of money that you set aside while you have a steady income. This fund later helps you in times of need, when you have no other source of money. Having an emergency fund is one of the best decisions you’ll ever make in your life and will definitely come in handy.
Here are some reasons you need to have an emergency fund;
1. Doesn’t Get Used Up Easily
A lot of people wonder why there’s a need for an emergency fund when we have easy access to money thanks to credit cards and debit cards. However, we’re continually using the money in our accounts, and you may find your account overdrawn right when you need some cash. An emergency fund takes care of this problem. The money in the fund is not accessible to you on an everyday basis, which means if the need arises, you’ll have a good amount of money available to you.
2. Minimizes The Need For Borrowing
Borrowing money from someone you know is one way to overcome financial hardships. However, finding someone who’d agree to lend you some money is a time-consuming task. If you’re short on time, you may not have even a minute to spare. Returning the borrowed money is also a huge burden on someone recovering from an emergency.
Having an emergency fund saves you from all this chaos. Since you have enough money set aside, you rarely have to ask anyone else for it. Sometimes you may find yourself needing a large amount of money. Even if your emergency fund isn’t large enough to cover your whole cost, it can reduce the amount of money you need to borrow.
3. Home Repairs
An emergency fund doesn’t just have to be for a financial setback. Home repairs also require a considerably large investment, which cannot be met by just regular income. If your toilet pipes are leaking or a room’s ceiling develops cracks, the needed renovations may empty your pockets within minutes.
Luckily, your emergency fund can help you bear such expenses easily. The money in this fund can also be used for repairs and home touch-ups that are not covered under your regular insurance.
4. Medical Bills
Most people usually keep some money from their monthly budget aside for healthcare such as dental visits in Canada. However, needing a sudden dental surgery such as a root canal extraction requires more money than usual. The money in your emergency fund can help you get any needed medical procedure done in a good time.
5. Emergency Travel
What would you do if a close friend or family member continents away desperately needs you to visit them? You may be able to take a few days off work, but will the money in your bank account be enough for travel?
It goes without saying that emergency traveling automatically increases your expenses when you have little choice. This is when having some amount in your emergency fund allows you to easily manage such expenses without having to return home with an empty wallet.
6. Job Loss
The economy can be unpredictable. What if all of a sudden you find yourself without a job because the company went bankrupt or you got in an ugly fight with the boss? Obviously, you aren’t going to get a penny in such circumstances.
You may be able to find another job in no time, but the chances are slim. The chances of finding a job just as good, or better, are even slimmer. This should be one of the biggest reasons to set an emergency fund. The money you save will support you and your loved one while you look for your next job.
7. Auto Repairs
If you own a vehicle, you’d know that maintenance can cost a significant portion of your monthly income and there’s nothing you can do to stop that. Despite investing in repair and maintenance, there is no guarantee that your car won’t give up on you in the middle of the street. An emergency fund will help you in such a circumstance without causing a dent to your monthly income.
8. Pet Care
If you own a pet, you’ll know that there’s no compromise when it comes to your pet’s health. But, taking care of a pet can get quite expensive. Your pet may also need emergency surgery that could cost you thousands of dollars. If you find yourself with no way one to arrange such an amount from your regular expenses, the money you keep in your emergency fund will help you.
9. Fine Payments
Getting a speed ticket or some other type of fine means you’ll have to pay for such unforeseen circumstances. This could be stressful if you can’t come up with the money soon. Luckily, for people with an emergency fund, this seems like no big deal.
10. Funeral Costs
Arranging the funeral of a loved one is as financially difficult as it is emotionally. If you don’t have insurance and savings, you’ll have to arrange a lot of money in a limited time for their last rituals. An emergency fund is the first thing to ease your difficulties at such a crucial time.
11. Children’s Educational Expenses
Parents never want to make any compromise on their children’s education. Private nurseries or high schools cost a lot and are likely to raise their fees regularly. Under such circumstances, you can rely on your emergency fund so that you don’t have to move your kids out of school. This emergency fund money can also come in handy for when your kids go off to college.
12. Sudden Tax Notice
You can be a regular tax filer but still, get a huge tax bill to pay at the end of the year. It’s usually hard to escape a sudden tax notice and the time within which you have to pay is also very short. That’s where your emergency fund comes in to lend you a hand. You can use your fund in such a situation to avoid any annoying investigations or potentially getting arrested for not paying your taxes on time.
Where Is The Ideal Place To Put An Emergency Fund?
You should never put your emergency fund in your regular savings account. The reason behind this is that a savings account is easily accessible, and you may end up spending on something that isn’t really an emergency. So, what’s the ideal place to save your emergency money? A separate savings account, which I also call a parking account! This is an account that is suitable to park your emergency fund. My ideal type of account for this purpose should be a high-interest yielding no-fee savings account.
Additionally, it makes no sense to have your emergency in any type of fixed investment account. Getting a separate saving account opened to save money for an unforeseen emergency is a wise idea. Make sure that the account is easily accessible so that you don’t have to waste even a single minute to get your money in times of need. Use your regular savings account to splurge on things that aren’t really an emergency – such as those shoes you’ve always wanted which are now on sale! Never forget to spend with a minimalist mindset.
Here’s how you can start to save money in your emergency account and keep on increasing your savings:
1. Start with an estimate of how much you ideally want to save for your emergency fund.
2. Set a goal to achieve each month.
3. Right after that, get your high interest savings account opened up with a reliable bank.
4. Transfer a fixed amount to the account at the beginning of each month.
5. Keep on checking how much money you’ve managed to save each month and decide if you need to save more.
How Much Money Should You Have In An Emergency Fund?
The answer to this question can be relative depending upon who you are and what kind of life you lead. However, a good rule of thumb is to save up at least an amount that is roughly equal to six months of expenses.
However, this doesn’t mean that you need to start your emergency fund with a lot of money. You can start with $50 or $500 and keep on adding more to the fund with each passing month. This way, your emergency fund will keep growing.
In life, we’re likely to face a number of emergencies that we can never be fully prepared for. In these times, it’s common to be anxious and panic. However, having an emergency fund can give you some sort of ease. It means when the need arises, you can take care of any dire situation quickly. This also means that you can live your day to day life without having to worry about anything going wrong all of a sudden.