How an Emergency Fund Will Save Your A$$

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You need an emergency fund.

This represents one of the basic pieces of personal finance advice.  Even so, many people don’t believe that an emergency savings are necessary.

If you want to improve your chances of achieving financial freedom, though, you need to change your mindset and acknowledge that an emergency fund is essential.

Here’s Why an Emergency Fund is Essential. Read These Now!

An emergency fund is essential.

To Deal with Unexpected Expenses


One of the best reasons to have an emergency fund is that it can help you deal with unexpected expenses.

A little more than two years ago, my basement flooded just before Christmas.  Since the cause was groundwater, and not a burst pipe, our homeowners policy didn’t cover it.  We had to come up with close to $3,000 to take care of the situation.

The fact that we had an emergency fund meant that we didn’t have to turn to debt to pay our costs.

From car repairs to new appliances, your emergency fund can supply you with the cash flow you need when something expensive and unexpected crops up.  Rather than straining your budget, you can just dip into you emergency fund to take care of the expense.

To Prepare for Financial Setbacks

Your emergency fund can also help you prepare for financial setbacks.  A job loss or a huge medical bill can cause serious financial problems.

If you have an emergency fund, though, you can reduce the impact.

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If you lose your job, your emergency fund can help supplement your unemployment benefits.  You can also use your emergency fund to cover some of your expenses while you are on extended leave from work for a medical condition, or to help you pay hospital bills.

While your emergency fund may not be large enough to completely cover your needs during major financial catastrophes, it can reduce the impact to your long-term financial situation.  Your emergency fund can mean the difference between being able to recover in a reasonable amount of time and being financially devastated.

For Financial Flexibility

Your emergency fund also offers a certain amount of financial flexibility.  With your emergency fund, you have more options.  It might mean that you can make do with a part-time job for a while as you start the side gig of your dreams.  It can also mean that you have a little leeway in terms of time as you search for a preferred job.

The flexibility can also provide you with options when it comes to dealing with expenses.

You can choose to put the expense on a credit card, earn the rewards, and then pay it off (you don’t want to pay interest!), rather than get stuck wasting your resources on interest payments.

For Peace of Mind

An emergency fund also provides financial peace of mind.  When you know that you have options, and that you are prepared for the unexpected, you are less likely to worry about money.  You can face the future with calm, and that reflects in all aspects of your life.

Financial peace of mind helps in the following areas:

  1. Health: Your physical and emotional health can be affected by stress and anxiety.  When you are worried about money all the time, it can lead to health problems.  Heart problems, depression, and other issues can all be associated with stress and anxiety.
  2. Relationships: Money worries can put strain on relationships.  Stress about your financial future can lead you to fight with your life partner, and show impatience when dealing with your children (and others).  With an emergency fund providing some stability, you can focus on keeping your relationships healthy.
  3. Taking Risks: With financial peace of mind, you can also feel more comfortable taking certain risks. You can feel more comfortable with investments, since you know you have a core emergency fund to back you up. It’s also possible to feel more confident about starting a business when you have the financial peace of mind that comes with an emergency fund.

Related: How to Get Started With an Emergency Fund

Bottom Line on Needing an Emergency Fund

An emergency fund is essential to your financial health and well being.  Your emergency fund can help you avoid financial catastrophe, and give you peace of mind about your financial future.

Do you have an emergency fund?  Does it help you feel more confident about weathering a financial setback?

Published or updated August 19, 2013.

Comments

  1. I could not agree more. We have an E-Fund and it does help us sleep at night as well as be able to weather things that might pop up that have to be taken care of. Since we run our own business, we couldn’t do it without an E-Fund, that would just be leaving too much open to chance.

    • Glen Craig says:

      When you have an emergency fund in place you still hate having to pay for emergencies but at least you know you can cover it. It’s a good feeling.

  2. We definitely have an emergency fund. I’m always afraid of something happening, and I’d rather be very prepared for it!

  3. I would like to share that it’s very difficult to maintain emergency funds. Fewer than one in four Americans have enough savings to cover at least six months’ expenses, and 27 percent have no emergency savings whatsoever.

  4. I agree! I have gotten into so much financial trouble by not having an emergency fund, or any savings whatsoever, and just putting those unexpected expenses on the credit card. Then I wouldn’t pay it off or save so it wouldn’t happen again. Finally I starred getting some cash in savings and I am always so grateful when I can pay for the emergency vet bill or the car repair out of savings and I don’t have to panic. Much more peaceful that way.

  5. An emergency fund is absolutely necessary and the reasons pointed out above are why. Be careful, though, to not have too much tied up in your emergency fund otherwise you could losing out on the returns of investing it elsewhere (or using it to pay off debt).

  6. I definitely agree with you on that, having your own emergency fund is really a necessity rather than a luxury for every family.

  7. An emergency fund is an absolute necessity! The hard part is, finding the leftover money to put into that fund! I seemed like the bills, the rising costs of food & gasoline were eating up my entire paycheck, with nothing left over for savings.
    I decided to change the way was spending my money. I was paycheck to paycheck with no savings. Over the past several months I’ve managed to save slightly over $700 in a emergency fund. I squirreled away, little by little out of each check. It has taken months to get this, but patience is the key. I made some small changes which have made a big difference.
    1- I pay myself first. I move $50 into the savings the day my check hits the account. If I don’t have it to begin with I don’t spend it.
    2- I ask myself, do I really need this? Is this a want or a need?
    3- I try to use coupons whenever possible.
    4- I make a list when we run out of things & I stick to it when I shop.
    5- I save on gas by running errands after work on the way home.
    6- I plan the meals I’m going to cook for the week & I rarely order out for food.
    7- I budget the amount I have to spend for food & household items, then I pay in cash instead of using the debit card. When I hand over the cash, I spend less.
    I don’t have any credit cards. I had them in the past & got into trouble with over the limit & late fees. I bought what I thought were needs & got buried in fees & couldn’t make the payments.
    In this economy, lots of stores have layaway. I bought my modest new living room furniture from a store that has layaway. It took me over 6 months to pay it off. Waiting for it made me appreciate it all the more. I need a new mattress, & through word of mouth, I found a store where I can put that on layaway & make payments for as long as I need to.
    My refrigerator needs to be replaced. I’m trying to hold out so I don’t use my entire emergency fund to buy a new one, but that is what it’s there for, emergencies. If I deplete, I’ll start over. It will build back again, slowly, over time.
    I try to keep a small balance in the checking account until the next payday. If I manage to have $25 from the previous check, I transfer that into the savings account. Remember, patience is the key. I don’t have anyone to depend on, or anyone who can borrow me money if I’m in a jam, so this has become a way of life for me. It takes discipline, sometimes I can’t get that new shirt or shoes I want, but I have the basic necessities that I need.

    • Glen Craig says:

      Thanks so much for commenting DeAnna! Yours is a prime example of how we can always find a way to save if we really try. The steps you took are spot-on and I’m glad you’ve been able to put an emergency fund together.

  8. Yes, true that. The importance of building an emergency fund has been self taught. From my own experience I can say that the urge to save up for an emergency fund should be developed from the early years of finance management learning.

  9. My wife hit the curb on the way home. Thank goodness for our emergency fund ($1,000) to pay the deductible for our insurance claim. Thank goodness x 2 that our tax return is right around the corner. Can replenish it instantly!

  10. Another great post Glen! Emergency fund is very necessary for us because it can possibly save our business when it’s on downfall stage. It’s also necessary on what emergency fund to apply.

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