You’ve probably heard that creating an emergency fund is important for securing your financial freedom, but it can be difficult to do this when you’re just trying to keep up with paying everyday bills. If you need a little motivation to stay focused on this task, we’ve created a list of the top reasons why you need your emergency fund. When you think about all the ways it can help you, it’s easier to keep your eyes on the prize.
To Pay for Unexpected Expenses
Essentially, the emergency fund should be used to pay for those sudden, unexpected expenses. Most people are focused on the two most common expenses -- home and car repairs -- but other expenses can certainly pop up out of nowhere. For instance, a sudden illness might leave you with a loss of income. If a family member becomes ill or passes away, you may need to purchase plane tickets to travel. Any of these expenses can cost thousands of dollars, and most people don’t have that much available in the monthly budget. They need an emergency fund.
To Help Balance Your Budget
When you first create a budget, you typically track your expenses for a month or two, then form a budget around those expenses. However, you may not have counted all of your expenses. For instance, you might only pay your car insurance every six months. If you didn’t factor that into your budget, you’ll come up short the month it’s due. Your emergency fund can help you adjust.
To Avoid Increasing Your Debt
There’s nothing worse than being close to paying off your debt only to have to add a big expense to the credit card because you didn’t have the cash on hand. This often happens to people who forgo the emergency savings because they want to apply every last penny to debt. By putting even a small amount of money into an emergency account, you’ll be more likely to break out of this cycle.
To Avoid Dipping Into Savings for a Goal
In a similar vein, you may not have a lot of debt, but find yourself struggling to save money for things like a down payment on a home or the European vacation you’ve been dreaming about. You get close to reaching the goal, but then have to dip into savings to cover other expenses. The emergency fund is still a savings account, but there’s a different feeling when spending the money. You know it’s there for unexpected expenses and don’t have to touch the money you’ve been saving for something you want.
To Protect Your Family Through Hard Times
Job loss can be devastating, especially if it takes you a long time to replace the job with something at the same income level. You don’t want to risk losing your house due to non-payment or find yourself struggling to put food on the table. This is why experts suggest you have anywhere from three to 12 months of living expenses in your emergency savings account. With this much money, you’ll be able to weather any significant change in income for a long time.
To Give Yourself Freedom
Sometimes, the emergency fund just works to give you better options. For instance, if you’ve decided you’re ready to start a business, the emergency fund can get you through the first few months. It can also help you make the decision to take a dream job that comes with a drop in pay. You know you’ll be back at the same level you’re at after a year or two, but the emergency fund can make up the difference in the meantime.
To Handle Life’s Ups and Downs
Budgeting often makes it seem like life is consistent. That’s often far from the truth. Fluctuations in income and expenses mean you need to be flexible enough to adjust. With your emergency fund, you’ll never have to worry about the down times.
Now that you’ve seen why it’s so important to have an emergency fund, it’s time to take steps to make that happen. Decide how much you can afford to contribute each month, then commit to adding to your emergency fund every single month. Even if you’re only able to put $20 toward the fund, you’re still working on building a more comfortable life for yourself.