Life is full of uncertainties and emergencies can happen anytime. And although it is impossible to predict when disaster will strike, we can still prepare for it financially by setting up an emergency fund.
What is an Emergency Fund?
An emergency fund is basically a fund you set aside for financial emergencies such as unexpected expenses or sudden loss of income.
Purpose, Importance, and Benefits of an Emergency Fund
The purpose of having an emergency fund is to have money available to cover financial expenses arising from unforeseen events such as illness, need for home or vehicle repairs, or sudden loss of job. Sickness brings not just hospital bills and medicine purchases, but it can also cause loss of income from not being able to work. Now imagine losing your main source of income. How will you pay for your monthly living expenses? How about your mortgages and loans? And what if there are people who depend on you? You will surely be grateful if you have set aside an emergency fund.
One of the main importance of having an emergency fund is the financial stability and security that it can provide. Losing your job, especially if it’s your only source of income, can really put you in a difficult financial situation and huge stress. This can happen to anyone regardless of how stable you think the company that you are working with is. One good example is how during the pandemic a lot of large companies were forced to cut down on manpower or cease operation. This resulted in thousands of jobs being lost worldwide. Surely, the pandemic has emphasized just how important it is to have an emergency fund.
A business can also benefit from an emergency fund in cases where there are prolonged payment concerns from customers. Uncollected receivables can affect a business’ ability to pay for their short-term liabilities such as employee salaries and accounts payable. With an emergency fund, you can ensure business continuity despite longer collection periods.
Another benefit of having an emergency fund is you can avoid borrowing money and its relative costs. Without an emergency fund, you will probably turn to your credit cards or apply for loans to pay for the unexpected expenses. The interest charges and processing fees can be costly, but you can avoid them if you have set up an emergency fund.
The emergency fund can also give you quick access to cash. When emergency strikes, you won’t have to sell your properties or wait for your loan application to be approved before you have the needed funds. Both can be time-consuming and have no definite outcome.
Lastly, the emergency fund can give you peace of mind knowing that you have the reserve fund to use for unexpected events. It can lessen the anxiety and stress of being in a difficult financial situation since you will be financially ready to handle such emergencies.
How Much Should I Set Up for an Emergency Fund
Financial experts suggest setting aside at least three to six months’ worth of your living expenses including your financial obligations as your emergency fund. It is best to extend it up to 1 year worth or more given how a pandemic can affect our lives. The emergency fund will serve as your temporary source of cash to cover your monthly expenses while you’re searching for a new job. It will also keep you from losing your mortgaged assets since you will have enough funds to pay for your monthly amortization.
Simple Tips to Start Building Your Emergency Fund
Here are some tips to help you build your emergency fund:
- Set a goal. Depending on your circumstances, decide on how much you would like to save and your target period to achieve it.
- Make it a priority. Prioritizing the emergency fund simply means that you make it a part of your monthly expenses. Don’t settle for whatever is left of your net pay before you save for your emergency fund. Based on your goal, set aside a percentage of your monthly income, then include it in your monthly budget.
- Automate your savings. You may talk to your bank, or you may set up a monthly automatic transfer from your regular bank account to your emergency fund savings account. This can help you save for the emergency fund without even thinking about it.
- Cut down on expenses. Review your monthly budget. You may look for ways to cut down your monthly expenses such as eating out less often or reducing your visits to your favorite coffee shops.
- Save that extra income or bonus. If you receive an unexpected income, maybe from a commission or bonus payments, save a big chunk if not all of it for your emergency fund. Remember this is only temporary while you are still building up your emergency fund. A small sacrifice for your financial stability and peace of mind.
Emergency fund should be an essential part of everyone’s financial planning. Life is unpredictable but you can be financially prepared. The emergency fund can protect you and your loved ones against financial difficulties and uncertainties. Start building your emergency fund today. Every dollar or any amount you save, no matter how small, can add up over time.
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