Do you have an emergency fund in place?
If your answer to the above question is NO, then you have to think about it again.
We all like the comfort of knowing your back is well taken care of no matter what.
In case things go wrong and you can’t seem to get your way around it. And, it ends up draining your finances, it is at this point an emergency fund comes handy.
Good financial practices demand that you secure yourself from the worst-case scenarios in life.
While setting up your budgets, investment plan, sinking fund for that trip to the Caribbean, remember to save some money for emergencies.
It will help a great deal when you least expected.
Why you need an emergency fund kitty
Here are the reasons why you need a well-stocked emergency fund.
1. An emergency fund will help you get out of debt
Circumstances we never anticipated often get us into debt.
Often, sudden changes in life make us uncomfortable. We compensate such changes by trying to level up.
These sudden changes often have financial aspect attached to it. And our brains are naturally wired to explore the easiest options first.
We therefore opt to borrow to offset the sudden changes and that means getting into debt.
But, such changes never stop to follow you wherever you go.
They always surprise you at the time we least expect.
You end up borrowing more and more each time.
The more you borrow, the more you tie yourself into cycles of debt which are never easy to untie yourself from.
You get stuck in life in the end. Your financial health sucks. You lose the ability to service the loans and the accrued interest, which keeps adding each day.
The credit score falls fast and a lower credit score means our loans are expensive. The effect this has on your life is that you end up paying more, remain with less money and we become poorer.
An emergency fund can help you not fall into such debt traps. It will allow you to live confident. And, knowing unfortunate events won’t ruin your finances and other life goals.
It gets easy fulfilling other life goals like,
- Paying your student loan.
- Saving for your new home.
- And, starting a business.
As the rule of thumb dictates, the first step matters a lot.
(1)Open an emergency fund account, (2) set up a standing order to feed the account (3) include it in your budget.
2. It will cushion against job loss
Losing your main source of income is one of the most stressful moments in life. The bills continue pilling, life goes on regardless of the job loss and worse you still have to pay your debts.
Job loss is the main reason financial advisers advocate for the need for an emergency fund.
Stash away enough cash to allow you to live a normal life when you no longer receive regular paychecks.
A sound financial plan demands you save enough to last at least six months of your expenses.
However, on average a person takes around 40 weeks before finding the next decent job. It is wise that your emergency fund reserves be big enough to last more than 6 months of zero earnings.
3. It fills in for salary reduction
In a job loss your salary stops at once.
However, there are instances when an employer reduces salaries by large margins. This often comes without warning.
Imagine your salary reduced by 50 percent or by three quarters due to hard economic times. Like it happened in the 2008 financial crisis .
Often, this happens at the time when your income is strained and cannot cover your daily bills.
Such situations demand that you secure yourself.
How do you do that? A healthy emergency fund will allow you to come out of such situations unscarred.
4. An emergency fund allows you to save for the unknown
Have an emergency fund in place to stand against those trying awkward life moments.
Life is unpredictable in itself.
Unpleasant moments in life are always waiting for the right moment to make your life miserable. Do not get caught unaware.
It’s prudent that you have at least a good cash reserve in the form of an emergency fund to take care of such.
The reserve will prove handy in easing the pain points and not throw your life into the deep end.
5. Its is your arsenal in anticipation for medical emergencies
The younger you are, the lower the chances of you developing serious medical conditions.
I can’t remember the last time I visited a hospital apart from routine checkups.
Therefore, I never see the need for an expensive (comprehensive) medical insurance cover. A big mistake!
Without an emergency fund, a 3 days hospital admission can throw your financial health to a limbo. And, you might never regain your financial independence for the rest of your life.
Even with your medical insurance, there are instances where you will need to dip into your pocket. This may be in the form of insurance policy deductibles and co-payments. These are rarely covered by most insurance.
Moments like these your finances are always stretched to the limit. Your every coin budgeted.
Dipping into your pocket for such miscellaneous expenditure might prove a challenge.
Also, you can take longer to recover fully and end up eating into your sick pay. You end up paying medical bills when you no longer earn a dime.
Your emergency fund in place will help your offset all these and go on living life as you want it to be.
6. As part of your smart personal finance goals
Do you have personal finance goals in place?
Is an emergency fund part of it?
In my personal finance goals -short term and the long term- a generous emergency fund sits at number three.
If your answer to the above two questions is no, then its time to act. Set your personal finance goals.
Among the short and mid-term goals include a well-stocked emergency fund.
It is a good advice your full year of your expenses be covered in an emergency fund.
It will allow you to live life with confidence and freedom knowing you have a backup plan in place.
You can thereafter fulfill your life goals which may include:
- Paying all debts
- Increasing income streams
- Building wealth.
7. To Cater for the larger than the anticipated tax bill
There are those times in life when things happen and you cannot explain how.
When I first started out on the path of side hustles, I was well versed with the nitty-gritty of finance and taxes.
In relation to taxes, I never thought at one time I will be caught off guard.
Even qualified specialists sometimes screw up and the mistake ends up costing us dearly.
I never factored in my income having crossed to the next tax bracket.
I was to calculate it differently which meant I had to pay more.
In addition to other deductibles, I had to pay double of what I planned for. There was no other way around it.
How was I to raise $5,000 in less than 24 hours without getting into high-interest loans?
Not paying it too is not an option. It would attracted hefty penalties making the whole thing more expensive.
By that time, my emergency fund account was not that big. But I was able to raise $4,500 from it and squeezed $500 from my budget.
I really prayed that month to come to an end fast.
A simple $500 budget deficit can prove to be a pain in the neck.
8. An emergency fund Step in for slow insurance covers
Some insurance covers claims are slow. It takes time to process them.
It might take hours for something that you need there-and-then. Days for something you need in a few hours or months to claim your benefits when you need it in days.
You will need cash to cover for such cases before your cover comes into your aid.
An emergency fund is a good place to seek refuge until your claims are validated and your money released. This is what “covering your back” or “playing safe” means.
9. In case of sudden travel costs
Traveling is expensive. Last-minute tickets are even more expensive.
In case of an emergency that demands you take the last-minute flight, you will need an emergency fund reserves to cover it.
With an emergency fund in place, you will be okay.
You won’t come back with an urgent need to cut life necessities. You will not have to live miserable to accommodate cash spent while away.
10. It’s part of your saving goals
It is good financial practice to have a bank account for unanticipated life moments.
As part of your saving goals, include savings account dedicated to emergencies. Do this first before you go on with your normal saving practices.
It will protect you against going into unnecessary debt. It will also allow you to live life with confidence.
How to get started with an Emergency fund
Here are 3 brief steps to make sure you get started in the right footing.
It will guide you to set up an emergency fund and run it successfully.
Step 1: Open a high yielding savings account
The first step in having an emergency fund is opening a high yielding savings account.
Unlike a normal savings account, high yielding accounts attract interest rate above 2.5%.
This rate ensures your money grows at a good rate.
When you factor in the compounding effect of this rate, you will obviously end up with more money.
The money will be enough to cater to your emergencies unlike with the low interest accounts.
Here is what you should look for before committing your money.
- The account must have the highest interest rate in the market. An interest rate above the average market rate is a good bargain.
- The account MUST have no fee or monthly charges.
- Your money must be easily accessible. You should, therefore, look for an online bank account. They offer convenience and reliability at no extra cost to you.
- If a bank offers other pecks, go for it. This may include a welcome bonus and chances to win gifts at different times of the year.
Step 2: Set up a standing order
Once you have a savings account in place, you will need a standing order.
A standing order is an instruction to your bank to deduct a specified amount of money from your main account. Let’s say account A. The money is then deposited into your specified account let’s call it account B. Your savings account.
It is done before it reflects on your paycheck. You therefore won’t feel the pain of saving.
The whole process is automated. It happens in the background and autopilot.
This money is then deposited to your high yielding account which is your emergency fund.
Make sure you allocate enough money to your emergency fund and remember to factor it in your budget.
Most online banks have this feature enabled in their web-based platform or mobile app. All you have to do is set it up. You can as well request it be activated for you through the customer care.
Step 3: Start saving
At this point, you have a high yielding savings account. You also have a standing order in place.
You can then start saving. Wait for your account to mature and you will be in safe hands.
Make sure you put enough money into your emergency fund account to last you 6 months to one year of expenses.
It starts with enough allocation.
Be smart with your standing order and achieve this goal fast.
Summing it up
An emergency fund is a must-have in today’s unpredictable fast life.
You will achieve other goals –owning a home, starting a business, getting out of debt, retire at 35 –faster.
There will be no need of dipping your hands into your long-term-savings every time you run into the deep end. Or even get into debt in the process.
Make the smart move. Have an emergency fund. Protect your long term goals.