An emergency fund is liquid money that has been earmarked for financial emergencies and unforeseen expenses. Emergencies do not include monthly expenses or wants, but rather things like medical emergencies, job loss, car repairs or major home repairs. The funds must be liquid (accessible) and you should never rely on credit cards or debt to get you through these. Having an emergency fund can make the difference between a financial bump in the short-term and a financial disaster that upends your life. Here we will look at why an emergency fund is so important.
Insurance at its Best
An emergency fund can be viewed as a type of insurance, although it is even better than that. Each month you put money into the fund (like insurance premiums) and if you need the money, there it is ready for you to use it. You never withdraw the money, unless you are facing an emergency and if you need to “make a claim,” you don’t need to prove anything to anyone – the money is available immediately. Even better, at the end of your days, that money belongs to you so that every premium you paid become part of your estate.
Freedom
Many people, at some point in their life, are unfortunate enough to find themselves in a situation that is unbearable. Without financial stability, those people will have no options, but to continue in their current state. That may be a relationship that is unbearable or a job that you can’t stand. With an emergency fund, you may be able to open your own business, start trading, or go back to school, but without the funds, these options will be impossible.
Job Loss
Most people who leave their jobs and have no other job lined up to start immediately, do not leave voluntarily. The risk of losing your job is generally considered to be the number one reason for having an emergency fund, because with no money coming in, you will need another source for paying your bills.
Major Medical or Dental Expenses
Medical events can be extremely expensive, particularly without health coverage. However, even with health coverage, when you take into account co-pays or other related out-of-pocket expenses, medical events can be very costly. The same is true for serious dental emergencies. Even a single event can be financially catastrophic if you have no emergency fund.
Repairs
The most common emergency repairs include car repairs and home repairs and some repairs cannot wait until you have saved up for them. A broken-down car so you can’t get to work needs to be fixed immediately. A leaking roof or broken heating/ cooling system probably can’t wait. Even if you have home insurance that will cover the repairs, the high deductibles will require you to have a sizeable sum of cash handy.
Bottom Line
Anyone who has faced a financial emergency will tell you that their emergency fund saved them. Don’t become one of the people who had no fund and has still not recovered financially many years later.