At times we are faced with unexpected financial surprises that life throws in our way. Some of the events that could lead to a financial mishap include medical emergencies and loss of jobs.
Experts recommend setting aside some cash, which is the emergency fund to deal with the financial uncertainties. This improves your financial security.
There is no set limit to the amount of emergency fund one should have. It all depends on a person’s net worth. If your net worth is very high, you are likely to have a huge emergency fund. The opposite is also exact. However, the emergency fund should have enough cash to service your needs for at least three to six months
How to Build an Emergency Fund
There are two primary ways one can use to build his/her emergency fund. The first one is putting aside a fixed sum of money from their monthly salaries. Since money is something that comes and goes within a blink of an eye, it is essential to set up an electronic withdrawal from your salary to the emergency fund each month.
The other way to build up your emergency fund is through tax returns. Tax refunds have always been viewed by most people as extra cash that is mostly used for enjoyment and other non-essential services. However, the tax refund can be a significant source of cash for your emergency fund. Once you get the tax refund, convert it to an emergency fund, and it will help you in the future.
Also, you should do everything to minimize your expenditure since the amount you save for your emergency fund will depend on your expenditure rate. Avoid buying unnecessary things that you can do without and invest the money in an emergency fund.
Why Do You Need the Emergency Fund?
There are so many benefits of having an emergency fund. If you see no need to have an emergency fund, this article will clear your mind. Below are some of the essential benefits of having an emergency fund.
Helps You Stay Out of Debts
When faced with unforeseen emergencies, we always try to look for extra cash to deal with the situation. The one thing everyone thinks of is borrowing money from people or banks. We end up taking huge loans from financial institutions that come with substantial interest rates. The problem comes when we have to pay back the money plus extra cash because of their interests.
Emergency funds can save you from all the struggles of having to borrow or seek loans. It helps you cover all the unexpected expenses without much struggle. No one will ever know you are facing a hard time if you have an emergency fund.
Gives You Peace of Mind
We all know how much stress emergencies and unexpected expenses can bring to us. Imagine being fired right now, yet you have no other income-generating activity. People who lack enough money are always faced with financial stress.
We should rethink the saying that money can’t buy happiness. You can only have peace of mind if you have enough money to cater for all your expenses. This makes emergency funds an indispensable factor in human life.
It May Act as Collateral
When seeking loans, the lender must be sure that you can pay even when faced with other financial problems. One of the things they look at before approving your loan is the emergency fund.
Any lender will be more than willing to give you a loan of any amount provided you have an emergency fund. The emergency fund is collateral in the form of liquid assets that can be used to access loans from financial institutions.
Maintaining Your Lifestyle
We have seen some people change their lifestyles because of emergencies such as loss of their jobs. They are unable to live a luxurious life as they used to when they were on a payroll. The main reason is that such a person didn’t think of the future. They didn’t of having an emergency fund.
If you want to maintain your lifestyle even after losing your job, you should start investing in emergency funds right now.
With the above information, you’ve learned something about the emergency fund. Make it practical in your life.