Of 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.
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