Why Everyone Needs an Emergency Fund
Unexpected emergencies can strike even at the worst of times. They say that catastrophes come in threes and for many people, this is a saying that has shown itself to be true over and over again! When the dishwasher breaks followed closely by a second appliance and then a family pet becomes ill, it seems like the three-fold rule of catastrophes is rearing its ugly head, and it’s your wallet that feels the most pain. When you have an emergency savings, the large and small tragedies that fill our daily lives can seem a lot less stressful to bear, whether it’s the rules of threes or just one unexpected incident.
Having No Emergency Fund makes Emergencies more Expensive
An emergency, such as a non-functioning appliance, automobile or cell phone, is something most of us want to deal with immediately; they’re essentially our lifelines. If we don’t have the cash to do so then we will likely rely on borrowed funds, either by using credit cards, taking money out of a retirement fund, or getting a loan of some sort. Each of these actions actually increases the cost of the emergency because they require us to pay interest, fees, and sometimes penalties on top of the cost of the emergency itself.
If you want to truly secure your financial future, you cannot waste money on added fees and interest for the emergency expenses that crop up. With an emergency savings fund, you can tap into your own excess funds and avoid these added expenses.
How Much to Save
Ideally, your emergency fund should reach a balance equal to at least six months of your expenses. You never really know how long an unexpected emergency can potentially put you out of work! When you’re starting with very little or nothing in your emergency account, this goal can seem intimidating. You may even be tempted to overcompensate and put aside a lot of money to catch up, only to put yourself in a financial bind due to over-saving. A better idea is to adjust your budget to reduce your overall spending so you can comfortably afford to set aside 10 to 20 percent of your income. Remember that saving for your emergency fund should not interrupt your debt repayment plans or your retirement savings efforts!
With an emergency fund, emergencies won’t seem as urgent or overwhelming. This offers you a sense of confidence, comfort and independence that’s worth even more than money.