Do You Have an Emergency Fund? Here’s Why You Need One

Posted in Investment By Prabhat Singh - Mar 10,2022
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An emergency fund is that safety net that can save you from an unprecedented financial fall.

Emergencies always come unannounced; the key is to be ready for them. Covid-19 was just an example of how helpless humans can be in the wake of a financial crisis. Also, taking the Russian-Ukrainian war for instance; the citizens of Ukraine were never ready for this unprecedented war. In recent times, the word emergency has found a new definition. It isn’t only limited to medical or financial emergencies anymore but also extremities like pandemics, recessions, and even war. And not everyone is ready for it nor are their finances. Hence, it’s absolutely necessary to have a surplus fund to tackle any of these emergencies if you wish to be in a comfortable position.

What is an Emergency Fund?

Money kept aside, saved, to help you during any unexpected financial knockdown is called an Emergency Fund. These knockdowns can be anything like a job loss, medical emergencies, home repairs, unplanned travel, etc. 

A question that always arises in everyone’s mind is how much money must be kept in an emergency fund. Well, every individual has a different opinion on it. However, ideally, the living expenses of 8-12 months should be the ideal emergency fund. 

Why Do You Need an Emergency Fund?

Withstand Medical Emergencies

One situation you must be ready for, at any given point, is a medical emergency. Your health is one of the most uncertain things & you cannot always plan anything for it. You cannot rely on your active income for the expense of your medical bills and depending entirely on insurance can prove to be trouble too. So, what’s the best way out? An emergency fund is your answer. Building and investing in these funds is the smart way to go. Ensure that these funds are equally split in liquid and in the bank so that when you need them, you can use them without any hassle.

Survive a Job Loss

To withstand a sudden job loss is one of the most challenging things to happen in this day and age. Assume you have a fixed amount of money credited to your bank account at the end of every month, and it suddenly stops. Are you prepared to hold up against the job hunt while managing your finances? If your answer is yes, then you must have these emergency funds ready. But if your answer is no, you need to start saving and build a rescue fund straightaway. During your job-hunting period, this fund will save you from the embarrassment of borrowing money from friends & family or increasing your debt by taking loans.

Paying Off Debt

Accumulating debts is never a pocket-friendly option, especially when you want to build significant wealth for your secure future. Paying off debts as soon as possible can set you towards financial freedom. There are various options available, like cutting off a few of your unnecessary expenses or taking a consolidation loan, etc. If you don’t want to do all of these, you can always use your emergency funds. These funds can save you from going into huge debts. However, remember not to use this emergency fund in its entirety for paying off your debt.

Unplanned Travel

These funds can also help you travel anywhere during any unforeseen crisis. Especially for people staying away from home, having an emergency fund set-up can prove extremely useful in case travelling back home is unavoidable. It is no secret that last-minute bookings can be more expensive and these funds will help you cover that and any other expense. 

Life is now more volatile than ever; you cannot just sit and plan your whole life without considering any emergencies, and these emergencies have the potential to exploit all your savings. Hence, to manage any of these or other unplanned situations, you must forge your emergency funds.

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