Professional Development

Why You Need an Emergency Fund

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By: Mariah Rogers
Nov 9, 2020 • 7 min read

Emergency Funds are Essential. Here Is Why You Should Have One!

If this past year has taught us anything, it’s that life can be pretty unexpected. The lesson I learned from this experience is that it is always better to be prepared. The saying “it’s better to be safe than sorry” is incredibly true. So, your finances must match this mindset. This doesn’t mean you can’t treat yourself or indulge in a fancy coffee every now and then. Having an emergency fund is simply a way to make sure you have backup finances just if something doesn’t go to plan. There have been many times where I could use some extra cash to enjoy a weekend out or purchase an expensive clothing item. However, your emergency fund should be kept for real emergencies. This blog will share some of the instances where you might need an emergency fund and how to start building your savings. You never know what could happen!

emergency fund

To Avoid Falling Into Financial Debt 

A simple rule of thumb for avoiding debt in everyday life – don’t spend more than you have. Unfortunately, this is not always possible. Especially if you have absolutely essential necessities. Living is expensive, and sometimes, your general savings isn’t going to cut it. There are a lot of unexpected twists and turns that life can take. For example, your dog might get sick, your car may need an expensive repair, or you might have to buy a plane ticket to visit a family member or friend urgently. While these are extreme circumstances, all of these examples are perfectly acceptable times to dip into your emergency fund. That’s why you have it! If you do not have an emergency fund and situations like these arise, you may find yourself falling into debt. This fall can be very challenging to get back up from.

Examples of appropriate times to use your emergency fund:

  • Medical expenses
  • Family emergencies
  • House, car, apartment necessities
  • Essential bills
  • Unforeseen accidents

Unexpected Unemployment

Times are tough, especially in today’s economic climate! Job security is becoming rarer, and many fear company layoffs. Some organizations have had to close altogether, leaving their entire workforce unemployed. If this happens, you’ll need to:

  1. Have confidence in yourself and begin marketing your skills to land a new position.
  2. Dip into your emergency fund to support yourself in the meantime.

If you find yourself unexpectedly unemployed, your rent, food, and loan expenses, don’t just come to a halt. You will still have financial responsibilities you must attend to keep your current lifestyle as you begin a new job search. Having an emergency fund will help relieve some of the financial pressure and burden you may be feeling and give you backup cash to help pay essential bills.

emergency fund

Making a Significant Investment

If you are financially stable enough to start thinking about making a significant investment, you can dip into your emergency fund to afford the down payment or first installment. Remember, only use these funds to get you started! Once you have made the first payment, you will be able to continue re-building your emergency fund for your next purchase.

Significant investments include:

  • Being financially independent enough to purchase a home. Use the emergency fund for the down payment!
  • Investing in your education. Going to college, grad school, or earning a certification that will significantly enhance your career.
  • Purchasing a necessary vehicle. If you get a new job and need your own car to make it all happen, this is a good time to dip into your emergency fund.
  • If the time is right, use the money to purchase safe stocks.

Building Your Fund – How to Start 

If you want to make it a habit with anything in life, you have to start small. Making your emergency fund is no different! If you have experience with budgeting and saving part of their earnings, this might be challenging at first. Try to take a look at the main areas in which you usually invest most of your earnings. Let’s say these areas are food, electronics, and your car. To cut down on the cost of food, you can eliminate eating out and shop at wholesale stores. If electronics are costing you a fortune, cut down on subscriptions. To decrease the funds spent on your car, consider walking, biking, or taking public transportation to get to where you need to go.

You can also:

  • Make coffee at home
  • Shop at thrift stores or only when your favorite brands are on sale
  • Avoid buying the latest and greatest technology
  • Sell your old belongings

emergency fund

Setting Boundaries With Your Emergency Fund

When you have extra money in the bank, it can be easy to over-indulge when purchasing. This is why it is essential that you set boundaries with your emergency fund. Put this money far away. Far, far, far away. This way, you won’t be tempted to touch it since it will be in a different account than you normally access. If self-control isn’t your strong suit, this is sure to help you keep your savings intact. Open a completely separate account only to be used in case of an emergency. Set a total monetary goal for the account, and once you reach that goal, put the money away!

Set boundaries by:

  • Putting the money in a separate account
  • Having family and friends help you hold yourself accountable
  • Store the savings in cash
  • Start small and invest in incremental amounts

So, what are you waiting for? It’s time to start saving!

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