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HomeFinanceWhy It Is Important to Have an Emergency Fund

Why It Is Important to Have an Emergency Fund

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The coronavirus pandemic put a real dent in the financial health of many Americans nation-wide. As many lost their jobs, their bank accounts were stretched thin in order to stay afloat. Some financial experts believe it could take years for U.S. households to recover economically.

According to a new survey, more than half of American consumers (56 percent) say they live paycheck to paycheck, with 48 percent revealing they have suffered unexpected financial setbacks in recent months. Another poll found that more than one-third (45 percent) admit to having no savings at all, and more than two-thirds (69 percent) have less than $1,000 put away for emergencies.

While this was the case for many people before the financial crisis, this economic insecurity has been exacerbated by the COVID-19 public health crisis. Is it time to give your finances a makeover? If so, one way to start is with your emergency fund. Also known as a rainy-day fund, having this money in your account or envelopes can give you peace of mind, while allowing your savings the opportunity to grow.

So, why do you need one? Here are several reasons why you need to build an emergency fund today:

1. Loss of Employment

Unemployment is typically the primary reason why every household needs an emergency fund. It is recommended that the best emergency fund is one that has six months worth of expenses. This would help if you had enough money for the essentials – shelter, food, and utilities.

Since it could take some time before you find another job, you can depend on these emergency savings without tapping into your long-term savings or investment account.

2. You Are Self-Employed

Being self-employed is a dream come true for so many people. But it is also quite the risk – financially. You no longer enjoy the security and comfort of a weekly paycheck. You miss out on benefits, bonuses, raises, and a long list of other perks we take for granted from permanent full-time employment.

As a result, it is critical to maintain an emergency fund when you are self-employed, particularly when you start out on this new professional journey. You may be waiting weeks or months without a stream of income or revenue depending on the turnover of your work. An emergency fund can serve as a buffer until you receive steady earnings.

3. Retirement

The last thing you should ever want to do in any situation is touch your retirement nest egg. A mutual fund, an ETF, a high-interest savings account, or bullion…consider these to be your untouchable financial holding cells! An emergency fund is there so you do not need to resort to tapping into your credit and your retirement.

On the safe side, perhaps it would be wise to transfer at least a portion of your savings to a second account, such as an all-in-one checking and investment account or a money market fund. This options still allows you accessibility to your money in the case of an emergency, but it also gives your funds the opportunity to grow, helping you inch closer to your golden years’ goals!

4. Repairs

A refrigerator shut down. Your car engine stopped working. Your roof needs significant repair. Whatever the case may be, repairs can be expensive unless you are a handyman yourself. Therefore, you will need to hire a professional who can effectively get the job done, and this can easily set you back hundreds or thousands of dollars. An emergency fund can help cover these unforeseen hefty expenses.

5. Injury or Illness

An injury or an illness can leave you sidelined for an extended period. Although many financial experts would say that a good option would be owning health insurance, it is not always a possibility for households. Therefore, an emergency fund can cover the basics for however long you need to recover.

6. Death in the Family

A death in the family is always a tragedy, and the emotional impact may temporarily prevent you from working or focusing on your finances, so an emergency fund can be utilized to ensure the rent and bills are paid during your time of mourning.

Moreover, funeral costs can be exorbitant these days, starting at a few thousand dollars. Plus, depending on your situation, you might need to travel to another location to attend ceremonies.

7. Emergency Pet Care

People spend hundreds, if not thousands of dollars per year on their pets. But the highest expense associated with keeping little Fido healthy are veterinary bills. If your animal becomes seriously ill, you need to be prepared to spend thousands of dollars on appointments, medication, and surgeries.

This is why pet insurance is becoming a huge segment of the insurance market. An emergency fund can also help cover these expenses for your furry friend, without having to pay a monthly premium.

8. World-Changing Events

As everyone witnessed over the last year, an event that is out of your control can lead to long-lasting effects, some of which can wreak havoc upon your finances. Natural disasters, terrorist attacks, political turmoil, global pandemics– there are so many events that could have detrimental consequences, so it’s good practice to safeguard yourself from the unexpected whenever possible.

A practical and effective layer of protection is an emergency fund that can be used to cover the cost of a broken-down vehicle, a sick dog, a job loss…or something much larger.

Paul
I am paul the founder of this website. I work in this field for seven years and I learn a lot about it. It's my wish to share my knowledge with others.

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