Why you must save for an emergency fund
YouGov’s Forbes survey in April 2021 shows how the pandemic triggered nearly 40% of people who had emergency funds to access them, with 73.3% using up half or more of the fund and 29% of it.
How did people without an emergency fund survive this period? Many went into debt and financial dependence.
Emergency funds should be an essential aspect of our finances because they could aid in unforeseen circumstances and help us maintain a healthy life in times of uncertainty.
But what, then, is an emergency fund?
What is an Emergency Fund?
A fund set aside to cover unexpected costs and periods of emergencies.
It’s like paying for insurance in case a tragic situation may occur in the future.
Emergencies happen unaware. They emerge from nowhere. However, not all issues that arise qualify for an emergency fund.
Your kids’ school fees or your daughter’s wedding is not an emergency because you were aware of these beforehand.
What are the issues that may arise that’ll enable us to take from this fund?
Examples of Emergency Fund
Taking from your fund for every issue that raises its ugly head will not serve its purpose. Emergency needs to be defined, e.g. losing a job, settlement of sudden medical expenses and unexpected car repairs.
Any unforeseen circumstances requiring money outside your regular spending qualify for an emergency fund.
Losing a job or being self-employed
Losing a job or being out of a contract would mean no source of income for a particular period, and we can never tell how long.
However, you can live on your funds until you get a new job or contract.
Medical Cost or Pet Care
We may not know when illnesses may come, but we sure know that they arrive at the wrong times, but we can prepare adequately through an emergency fund.
Sickness takes our loved ones and gives us pain in exchange. We’d avoid the pain of losing a loved one or furry friend when we prepare for it through this fund.
We can give them the best medical care without running into debt or tampering with our savings plan if we have money set aside for this period.
Home or Car repairs
Your insurance policy may not cover all forms of damage, but your emergency fund would undoubtedly cater to such damage.
If you follow the standard way of saving for an emergency fund and your home or car gets damaged beyond what you initially budgeted for, fretting will not be an option. For example, you budgeted for a tyre repair only to discover that two others were affected.
You wouldn’t have to tweak your budget for the two others because the 3–6 month principle should cover it.
How much do I need to set aside?
Calculate your expenses for 3–6 months and begin saving towards it. If you can save up to 3 months, that’s fine, but six months is excellent.
If you lose your job right now, you’d have enough to take you for 3–6 months.
Advantages
An emergency fund is different from your savings. You can maintain your saving plan while setting money aside for urgent situations.
One of the advantages of this money is that you don’t have to bother about where to raise funds or accumulate more debts.
You’d free yourself from financial pressure.
How to build discipline
Saving for an emergency fund should take a regular, planned and disciplined process.
Have a disciplined approach by setting aside your emergency fund immediately after you receive your income through automated savings, e.g. Automate 10% of your income when it hits your account into another high-yield savings account.
This account shouldn’t have access to a debit card. And ensure it is used strictly for emergencies.
Bottom Line
Imagine the ease of dipping your hands in your pocket to settle issues without affecting your budget or saving plan.
This ease comes with a burden. You may have to create side hustle(s), passive income and even cut unnecessary spending, but it’s remarkable in the long run.
One key attribute of financially intelligent individuals is that they’d always have an emergency fund.
