Why an Emergency Fund is Important

6 Sep

Once the unexpected strikes, you need to have a financial cushion to surpass the stress without busting your budget. Shockingly nearly half of Americans said they wouldn’t be able to cover a surprise expense of $400. This is, in fact, another way of saying that pretty much 50% percent of Americans do have troubles with the financial flexibility to respond to unforeseen costs and investment opportunities. 

At first glance, it may not seem the most exciting financial goal, but an emergency fund is a base your economic stability is built upon. Without having a sufficient emergency fund, it's only a question of time before the financial challenge that life may throw your way will eventually derail your financial stability. 

What is an Emergency Fund?

Why an Emergency Fund is Important

An emergency fund, also disclosed as a rainy-day fund, is a financial buffer set aside to cover mishaps or unexpected expenses in the future. Whether your car breaks down, you lost your stable income, or just plan a trip to the ER; an emergency fund can help you deal with the impact of unforeseen expenses and give you peace of mind. When building an emergency fund, there are three major things you need to consider: 

  • How much you need to save each month
  • How to reach your goal 
  • Where to keep your savings 

Setting up and maintaining an emergency fund must be one of your top priorities. While the primary purpose of investing is to make money to use in the future, the main purpose of building an emergency fund is to take care of your finances in the present.

How do I Build an Emergency Fund?

Financial experts believe that an emergency fund should have enough money to cover at least three to six months of your household expenses. In fact, your goal should be maintaining your living standard without dipping into your investments or 401(k). 

Calculate Your Monthly Expenses

To start setting up your emergency fund, you can make a list of all of your monthly expenses, including rent, mortgage, grocery bills, insurance, and even small expenses such as utility bills or cable services. 

Set a Monthly Savings Goal

When you have made up a list of your monthly expenses, total the amount and multiply it by six or as many months as you want it to last. That number will be the numerical expression of your savings goal you need to achieve whatever it takes. While it may take some time to accomplish this goal, don't be put off by the effort required. There is no better time to start saving and building financial stability than now. 

Reduce your Speeding 

When you set up your monthly expenses, ask yourself whether all costs on your list are necessary. For instance, $20 for premium cable channels that you barely watch may seem insignificant, but every bit helps and adds up over time. 

Set up Automatic Transfers

The next step is to consider the fixed percent of your monthly contribution to your savings account through setting up automatic deposits. Then, contact your bank or credit union to arrange recurring auto-deposits into your rainy-day fund. 

Saving on Tax Refund

Consider getting portions of your tax refund directly into your savings account via direct deposit.

Keep Your Funds Liquid

Unexpected emergencies can happen in the wink of an eye; that's why it's essential to have your emergency funds liquid so that you can access them quickly. In simple terms, keeping funds liquid means having them on an account that no withdrawal fees apply. Such accounts can be either checking or savings accounts offered by your local bank or credit union, enabling you to access your money at any time.