Why an emergency fund is important
Why an emergency fund is important
Life is uncertain, you should always be prepared and expect the unexpected. Embracing a positive mindset can always help you deal with any difficult situation. And, the positive mindset and confidence come as a result of solid planning. If you are not well prepared, any unexpected event like a sudden loss of job or medical emergencies in the family or sudden need of home repair or any such unavoidable expenses can result in financial setbacks, which can be temporary or permanent setbacks. There are many ways to plan for unexpected situations such as availing of life insurance, health insurance, or personal accident insurance, etc which are all part of your financial planning. But, the first step of the preparation is to build an emergency fund.
What is an emergency fund?
An emergency fund is a savings that can be easily accessed and is in liquid form to utilize during emergencies. For example, in the unfortunate event of sudden job loss, you can use an emergency fund to cover your loan EMIs and living expenses. An emergency fund is built to deal with a financial crisis during rainy days. The financial experts say you should have at least three to six months of your income set aside as an emergency fund.
How much of an emergency fund to set aside may vary from person to person depending on your financial condition, regular expenses, and lifestyle. For example, if you are a family of double income, you may not need to set aside funds for emergencies as much as the single income family needs to. However, irrespective of ‘how much to be saved for an emergency’ it is essential to build an emergency fund for everyone for a smooth financial journey.
Why is it important to build an emergency fund?
An emergency fund is nothing but a safety net against the uncertainties that lie ahead. The ultimate reason to have an emergency fund is to gain peace of mind against any unpleasant events that may result in financial instability. There are various reasons for which it becomes important to build an emergency fund. Let’s take a look at some of the key importance of building an emergency fund:
To avoid high interest debt
When you have an emergency fund, there is no need for you to avail of additional credit such as using your credit card, availing a personal loan or high-interest payday loans, etc. Stressful events can be handled without having to take the burden of additional debt.
To deal with the sudden loss of employment
One may have to face ups and downs in their career path. Especially during the pandemic, one needs to be ready for pay cuts and temporary job loss. Setting up a contingency fund can be of great use to cover the expenses such as loan EMIs, fees for children’s education, insurance premiums, food, and rent, etc.
To manage medical emergencies
Medical emergencies can hit anyone at any time. Uninsured medical emergencies can burn a huge hole in your pocket. Hence, having an emergency fund set aside for such uninsured emergencies is extremely important which can be utilized without disturbing your budget and savings.
To get through unexpected events without any hassle
Unplanned expenses can pop up anytime. Sometimes household repairs and vehicle repairs may run up to a few thousands and might be must-fixes for which you will need to have the contingency funds set aside as and when they come up. Unplanned travelling expenses are another major expense that can potentially put a hole in your wallet. If you are salaried, extra tax payments at the end of a financial year could also wreck havoc.
To adjust and stay within your budget
The first process to build an emergency fund is to create a budget. When you have a clear budget, you can easily set aside money towards your various goals and start investing towards them while setting aside a small portion of your savings towards the emergency fund. As a result, when you face a financial storm, you can draw from the emergency fund that you have built instead of disturbing your monthly budget. In this way, you can easily deal with short-term financial instabilities.
To stop yourself from depleting your savings for major goals
When Faced with an unplanned event, most people either take loans or liquidate their existing investments to deal with the cash crunch. To keep your financial house in order and to reach your goals within the timeframe, it’s important to not deplete your savings that are meant for major goals.
It is not surprising that when life presents an emergency, it threatens your financial well-being and causes stress. If you're living without a safety net, you're living on the "financial" edge—hoping to get by without running into a crisis. Being prepared with an emergency fund gives you confidence that you can tackle any of life's unexpected events without adding money worries to your list.
Disclaimer
This blog is meant for educating people about the importance of the right financial planning. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Consult your financial advisor to get personalized recommendations based on your life circumstances.
About Rajiv Nair
Rajiv Nair co-founded Finshield Investment Advisors after successfully managing several large clients and businesses in the financial services industry for over 15 years. Rajiv is a Certified Financial Planner who believes – ‘Any amount of effort in wealth management is worthless if at least a part of it is not usable within your lifetime’. He is known to be steadfast in his Investment philosophy and an avid reader on diverse subjects. Learn more about him here Rajiv Nair | LinkedIn
Life is uncertain, you should always be prepared and expect the unexpected. Embracing a positive mindset can always help you deal with any difficult situation. And, the positive mindset and confidence come as a result of solid planning. If you are not well prepared, any unexpected event like a sudden loss of job or medical emergencies in the family or sudden need of home repair or any such unavoidable expenses can result in financial setbacks, which can be temporary or permanent setbacks. There are many ways to plan for unexpected situations such as availing of life insurance, health insurance, or personal accident insurance, etc which are all part of your financial planning. But, the first step of the preparation is to build an emergency fund.
What is an emergency fund?
An emergency fund is a savings that can be easily accessed and is in liquid form to utilize during emergencies. For example, in the unfortunate event of sudden job loss, you can use an emergency fund to cover your loan EMIs and living expenses. An emergency fund is built to deal with a financial crisis during rainy days. The financial experts say you should have at least three to six months of your income set aside as an emergency fund.
How much of an emergency fund to set aside may vary from person to person depending on your financial condition, regular expenses, and lifestyle. For example, if you are a family of double income, you may not need to set aside funds for emergencies as much as the single income family needs to. However, irrespective of ‘how much to be saved for an emergency’ it is essential to build an emergency fund for everyone for a smooth financial journey.
Why is it important to build an emergency fund?
An emergency fund is nothing but a safety net against the uncertainties that lie ahead. The ultimate reason to have an emergency fund is to gain peace of mind against any unpleasant events that may result in financial instability. There are various reasons for which it becomes important to build an emergency fund. Let’s take a look at some of the key importance of building an emergency fund:
To avoid high interest debt
When you have an emergency fund, there is no need for you to avail of additional credit such as using your credit card, availing a personal loan or high-interest payday loans, etc. Stressful events can be handled without having to take the burden of additional debt.
To deal with the sudden loss of employment
One may have to face ups and downs in their career path. Especially during the pandemic, one needs to be ready for pay cuts and temporary job loss. Setting up a contingency fund can be of great use to cover the expenses such as loan EMIs, fees for children’s education, insurance premiums, food, and rent, etc.
To manage medical emergencies
Medical emergencies can hit anyone at any time. Uninsured medical emergencies can burn a huge hole in your pocket. Hence, having an emergency fund set aside for such uninsured emergencies is extremely important which can be utilized without disturbing your budget and savings.
To get through unexpected events without any hassle
Unplanned expenses can pop up anytime. Sometimes household repairs and vehicle repairs may run up to a few thousands and might be must-fixes for which you will need to have the contingency funds set aside as and when they come up. Unplanned travelling expenses are another major expense that can potentially put a hole in your wallet. If you are salaried, extra tax payments at the end of a financial year could also wreck havoc.
To adjust and stay within your budget
The first process to build an emergency fund is to create a budget. When you have a clear budget, you can easily set aside money towards your various goals and start investing towards them while setting aside a small portion of your savings towards the emergency fund. As a result, when you face a financial storm, you can draw from the emergency fund that you have built instead of disturbing your monthly budget. In this way, you can easily deal with short-term financial instabilities.
To stop yourself from depleting your savings for major goals
When Faced with an unplanned event, most people either take loans or liquidate their existing investments to deal with the cash crunch. To keep your financial house in order and to reach your goals within the timeframe, it’s important to not deplete your savings that are meant for major goals.
It is not surprising that when life presents an emergency, it threatens your financial well-being and causes stress. If you're living without a safety net, you're living on the "financial" edge—hoping to get by without running into a crisis. Being prepared with an emergency fund gives you confidence that you can tackle any of life's unexpected events without adding money worries to your list.
Disclaimer
This blog is meant for educating people about the importance of the right financial planning. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Consult your financial advisor to get personalized recommendations based on your life circumstances.
