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Three Reasons Why You Need an Emergency Fund

Emergency FundOf course, we all hope that we would never have a need to use an emergency fund. In a perfect world, we would be able to plan our expenses well in advance, and make sure that we have the resources available to take care of our obligations.

Unfortunately, that isn’t how the world works at times. Large financial expenses come up from time to time, and you might not have much warning when they do. If you are unprepared for such circumstances, you may be left scrambling to make accommodations to deal with the expense and keep paying your other bills as usual.

For this reason, it is important to have an emergency fund available that you can tap into if something should come up. The size of your emergency fund is going to vary based off your personal circumstances. My wife and I have an emergency fund that covers over six months of expenses as we’re self-employed, one of that size may be too large for you, but something closer to one or two months might be better. Regardless of the size of your emergency fund, it can provide peace of mind, and can help you get out of a tough spot if something should come up.

Let’s look at three specific reasons why it is a good idea to have an emergency fund

An Emergency Fund Can Help You Stay Out of Credit Card Trouble

If you don’t have an emergency fund to use, a likely alternative for many people is going to be using their credit card. This generally is not going to be a reasonable solution, as it can cause trouble down the line if you’re unable to pay off the credit card on time. By holding onto some emergency money and being able to pay cash for unexpected expenses, you can keep your credit cards clear and avoid having to go into debt.

Sudden Unemployment

It isn’t a fun topic to think about, but unemployment is something that happens to many people at least once in their lives. If you should suddenly find yourself unemployed for a period of time, having an emergency fund available is a great relief while you try to find a new job.

Even just a month or two of money in reserve can greatly lessen the stress and pressure you feel while unemployed. It still will not likely be a fun time in your life, but at least you can keep up with your bills and focus on looking for new opportunities.

Add to Your Savings

By making a habit of adding a little bit to your emergency fund each month, you might find it growing larger than it needs to be over time. That is a good problem to have – simply transfer the excess money to your savings account and you will suddenly have a larger pile of cash in your savings to use later on down the line. Think of your emergency fund as a second savings account that you are ready to use if needed, but are planning to hang on to and be able to use at your own discretion when necessary.

You don’t have to have a huge sum of money stored away in an emergency fund, but it should be enough to at least partially cover expenses that may arise. A little as a few hundred dollars can come in handy, so dedicate one of your accounts to an emergency fund and add to it a little bit at a time, when possible.

 

Do you have an emergency fund and if so, when was the last time you had to use it? How big is your emergency fund?

 

Photo courtesy of: Tax Credits

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John Schmoll is a Dad, husband and veteran of the financial services industry. He's passionate about helping people learn from his mistakes so that they can live lives free from the shackles of debt and empowered to make their money work for them. You can check out his other sites: Frugal Rules, for ways to improve your financial literacy; and Sprout Wealth for tips on different ways to make more money. John has been featured on Forbes, Lifehacker, Yahoo Finance and US News & World Report and more. If you're wanting to grow your blog, check out my blog coaching services to see how I can help you take your site to the next level.

20 comments

  1. Great post, John =)

    My emergency fund is the reason I’m sane. Crazy things can and do happen and it’s best to be financially prepared for the unknown.

    • Thanks Holly!

      I’m pretty much the same way. We get goofy looks when we tell people how big our EF is, but it’s what helps us sleep at night. That’s also not to mention the fact we don’t know what the future is going to bring with our business, so it’s better to be prepared than not.

  2. These are great reasons, John, and honestly I tell people that $1,000 to $5,000 “events” happen ALL the time and you never know what it will be, it could be job loss, health issue, move, car, etc. The only way to not stress out when those events arise is to have the emergency fund. It’s like anti-anxiety meds, but better.

  3. We started filling our emergency fund at the beginning of this year, the initial plan is to have enough to cover 3 months expenses. It’s been surprising how often we’ve had to use it in the past 5months with moving and car trouble. Great point about having some extra cash at hand to pay off any larger credit card bills!

  4. Having an emergency fund is a must. It also helps you avoid accumulating debt especially when something unexpected happens.

  5. This is so true, especially about the sudden employment. At least if you have money to get by for a couple of months you can focus on finding a new job instead of worrying about how to get through each day.

  6. I have a three month emergency fund but I’m working on building it up to six months.

    Emergency funds save you so much stress and actually save you money. Before I had my emergency fund, I used my credit card for every emergency and ended up paying interest in the process. One of the great things I have found about having an emergency fund is that after I had the fund, my “emergencies” started to disappear. I used to have emergencies all the time – car problems, house problems, etc. – now I don’t seem to have any even though I’m ready for them.

    • That’s awesome Aldo, way to go!

      I agree, they can save a lot of stress especially when a credit card is serving as the quasi EF. It is funny to see how those things disappear, that means you’re on the right track.

  7. I like the idea of using your e-fund as a bit of a savings fund at the same time. Theoretically your e-fund is supposed to be there for job loss, but people end up using it for more – unexpected repairs/replacements, family emergency etc. For this reason, I think it’s better to have it higher than you think you need. Then if you have to dip into it, it’s just a matter of building it back up again over time, without panicking too much.

    If someone is starting out with no e-fund at all, saving 3 – 6 months of expenses can seem overwhelming. Start with getting to $1000, then the next thousand and so on. Mini milestones will make the journey manageable.

    I had to dip into my e-fund recently due to hubster’s variable income. I’m so glad it was there. Now I’m working on replenishing it and I am going to take it to a higher amount. Even though we had it, I still panicked a bit because it wasn’t clear how long his earnings slump would last. It would have been a totally different story if we didn’t have it though. #freakoutcity

    • I agree Deb, people can tend to use an EF for things it really may not be meant for. That’s part of the reason why we have several different parts to our EF – one for the house and one for major car repairs. That way we can pull directly out of those buckets if need be and not impact our main EF.

      It definitely can be overwhelming. I say start at $500, then attack $1,000 and go from there. Those milestones can help you build momentum.

  8. As an actress, my emergency fund has been crucial for helping me get by between gigs. The first thing I do when I book a new job is replenish the fund.

  9. As of today, I don’t have one. I don’t have a family yet, and no one is dependent on me, so I decided to invest all by savings in stocks, and let it grow there for the time being.

    • I can definitely understand that Mark. The one concern I would have is if a genuine emergency pops up and you need quick access to cash and you wouldn’t have that with stocks. That said, you gotta do what works for you. 🙂

  10. Having an emergency fund allows me to sleep at night. No matter what may happen tomorrow, I know that I have money set aside to get me through it. While I hope I never have to use my emergency fund, that isn’t reality.

    • I feel the exact same way Jon. It helps us sleep at night. Our business could come to a halt and we could make it for at least six months. It’s worth having that peace of mind.

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