Why an Emergency Savings Fund is So Important

William Koper

Financial security is important for every person, but many people fail to prepare for the future. Putting money toward an emergency savings fund should be an essential goal for every individual and household. Even a small amount of money can help individuals look forward to the future without being unprepared for unexpected expenses.

However, knowing where to get started – or why you need one in the first place – is not always obvious. Learning more about this type of fund can better prepare you to start saving (if you haven’t gotten started already).

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Why is an Emergency Fund So Critical?

Families have certain bills that they are responsible for each month, many of which are the same across households. Some of these expenses include:

  • Mortgages
  • Health insurance
  • Life insurance
  • Car payments and insurance
  • Home utility bills
  • Food
  • Transportation costs

Many families live on a weekly or bi-weekly paycheck without any savings left over after paying the monthly bills. If the working individual(s) is let go or becomes ill or injured, they will not be able to provide for the family. This could be tragic, so it’s important to ensure that the family is financially secure for future emergencies. Even if you think you’re safe, chances are, you can’t 100% guarantee a major event won’t happen to you.

Renters can be evicted with no backup housing or funds to rent a room.

People can lose their homes to foreclosure.

You may lose your insurance due to a job or income change that leaves you high and dry on some bills.

If you can’t make your car payments, chances are, your vehicle will eventually be repossessed.

The shelter is a must, as are transportation, food, and prescription drugs, amongst the gazillion other payments we have to make as members of society. While one of these bills might be manageable on a reduced budget, most people don’t earn enough to cover all of their expenses during economically fraught times.

The moral of the story is, that it’s imperative to save a separate emergency fund.

How Much Should You Save?

According to most financial experts, it’s wise to save at least six months of net living expenses in an emergency fund. So, if a family requires $3,000 a month to pay all of its expenses, then it should strive as a unit to accumulate $18,000 in an interest-bearing emergency savings account.

This sounds like a lot of money, and for the average person, it is. However, by putting away even small amounts of money regularly, this financial consistency will lead to a quick accumulation of that essential nest egg.

How To Save For An Emergency Fund

There are several things an individual can do to save money. One way is to start cutting back on things that are not needed. For instance, an individual can stop eating out each day or buying unnecessary items at the home. The money saved can be placed into a savings account each week. As the account starts to grow, you’ll probably start to feel a real sense of accomplishment, and you probably won’t even notice the things that you cut out of your spending.

Another way an individual can prepare financially for the future is to pay down his or her debt by signing up for a Debt Management Program with a credit counseling agency. With less debt, there will be more money to add to the savings account. Each year the savings account will grow as you add more money to it.

Furthermore, individuals and families should try to spend money sensibly. For instance, a house or automobile should be within its spending budget. As an example, one should not try to buy a $250,000 home if their budget will only allow them to spend $100,000 without destroying their credit rating. By spending sensibly, they will not go into debt above their income, and this will allow them to have more money to put in the emergency fund.

Many people may think they are financially secure and have no need for an emergency fund, but we never know what lies ahead in our lives, or what financial difficulties we may face. But there are many reasons why you should work on padding your emergency fund.

8 Reasons You Should Have an Emergency Fund

You’re Trying to Pay Off Debt

Your emergency fund can help you stop adding to your debt with every financial bump in the road. An emergency fund can help cover the things you don’t budget for, like car repairs or medical costs. Use your emergency fund to handle these stressful events and make it easier for you to stay focused on getting out of debt.

It is easier to pay extra money on debt right away when you have a cushion for unexpected expenses.

Include an emergency contribution in your budget until it is fully funded.

You Just Started Budgeting

When you first start budgeting, you may be inadvertently leaving out some of the expenses that you need to plan for. Your emergency fund can cover some of these expenses the first year, and then you can add those expenses into your budget as they come up.

This could be annual expenses like taxes or other items like gifts or fees for organizations. Your emergency fund can help you as you adjust to your budget.

As unplanned expenses come up, write them down and adjust your budget to include them in the future.

After a few months, you should not have any unexpected expenses.

You Only Have One Income

If you only have one source of income, it is essential to have a substantial emergency fund. This can help you get through an unexpected job loss or illness that keeps the primary breadwinner from working.

If you’re a one-income family or you are single, you should have at least a year’s worth of expenses in your emergency fund. You can build up a larger emergency fund after you get out of debt.

If you are just starting a family, you may need to increase your emergency fund.

If you are single, work on building up your emergency fund as quickly as possible.

You Are Self-Employed or a Contractor

If you are self-employed, an independent contractor, or if you work a job that does not allow you to claim unemployment benefits, it is important to have a good emergency fund in place.

Additionally, if you know that your contract may end soon, you should work on building up more money in your emergency fund.

You may also want to plan extra savings for months when business is slow.

Keep track of your invoices to make sure that you do not miss outstanding payments owed. This will help you avoid using your emergency fund.

You Own Your Home

When you own your home, you will have to pay for all of the necessary repairs and upkeep. Although you should set up a sinking fund to cover remodeling and most repairs, you may have unexpected costs like plumbing repairs or air conditioning repairs.

Your emergency fund can help you handle these costs and make owning your home just a bit less stressful.

Home repairs can be expensive, as is replacing an air conditioner or furnace. Try setting up funds to save for these expenses before they occur.

Be sure to plan for your taxes in your budget.

You Live Far Away from Family

It can be expensive to travel home, and the costs go up if you need to travel at the last minute for an emergency. It helps to have a good emergency fund saved up to cover the cost of last-minute tickets to home or other family members in the event of a medical emergency or a funeral.

Price the cost of an airline ticket and other expenses and start saving up for that.

Remember that last-minute bookings are often more expensive.

You Have Medical Issues

A serious medical condition can cause you to max out your deductible each year. You may also have routine tests that add up quickly or need to use all of your sick leave and end up taking days off with no pay.

A well-funded emergency fund can help you deal with these costs and make it easier to get through these challenging times.

Medical issues can be expensive and insurance companies may not pay everything that you expect them to pay.

You may also miss work and run out of sick pay which can lead to bigger issues. Your emergency fund can help offset this.

You’re Saving for a Goal

If you are working toward a goal like owning a home or starting a business, your emergency job can stop you from dipping into those savings when unexpected expenses crop up. This can prevent you from moving backward with these goals.

Although your progress forward may slow a bit as you rebuild your emergency fund, you will be able to leave the money that you are saving for yourself.  This is a great way to protect your savings.

An emergency fund can help you reach your long-term financial goals.

Think of your emergency fund as an insurance policy against unexpected expenses.

Every Household Should Have An Emergency Savings Fund

There are many reasons an individual or family needs to plan for the unexpected. Medical emergencies, house repairs, auto repairs, and retirement are just a few of the reasons for having an emergency fund. At retirement, individuals will want to have enough savings to live comfortably. Social Security will not ensure them of having enough money to enjoy retirement. However, if they start now preparing for that day, they can look forward to their retirement.

An emergency savings fund is essential for an individual’s health. Living with the fear of not being financially secure for the future causes unnecessary stress. Stress can lead to many health issues, and health issues can lead to income loss. Therefore, by establishing a savings fund you can help eliminate stress and allow for a more peaceful and comfortable life.

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William Koper