When it comes to emergency fund, never ever bring this thought to your mind i.e why should creating an emergency fund be a top priority ? or Is it really required to have an emergency fund !
You may not realize the importance and gravity of an emergency fund right now or when you are young but life is very much unpredictable. You do not know at what point of time you will need a huge amount of dollars.
When there is sudden need of fund most of the Americans are clueless about it. Let’s take few examples – You may need an emergency fund for higher studies. May be you want to get treated for term at the best hospital of NewYork. If you don’t have an emergency fund you will get an immediate jolt.
Planning your financial life does not only imply planning your financial long-term requirements, it would be incomplete if you do not have an emergency fund in case of unforeseen emergencies.
Establishing an emergency fund, distinct from your regular savings or control account, can help you prepare yourself for the unforeseen events of your life, like your vehicle breakdown, house or appliance repairs, and, worse, unemployment after a pandemic.
Prioritizing all your financial objectives may be tough, but accumulating at least some money for an emergency fund is one of the first aims to accomplish.
Setting financial objectives may help you do something to make you feel financially more secure one step closer.
Let’s know more about why should creating an emergency fund be a top priority.
Table of Contents
What is An Emergency Fund?
An emergency fund is a savings account with money to be used exclusively for emergencies, such as a loss of employment, abrupt health, or an urgent vehicle repair.
You can allocate these funds in crises and when require money to finance. It is not utilized for costs such as a new vehicle or a domestic down payment. Instead, money should only be spent in crises.
For instance:
- Unforeseen medical costs
- Loss of Job
- Repair of vehicles or house decoration
- Helping someone nearby
- Any financial crises and so forth.
Emergency funds are not designed to meet everyday costs and fundamental requirements. These funds will act as a supporting hand when you truly need them or during a medical emergency.
Also Read: Asset Allocation Vs Diversification
Why Is It Important To Build An Emergency Fund?
The creation of an emergency fund offers a safety net in times of need. Unlike a high-interest loan or a credit card, emergency savings enable you to pay interest-free for life’s essentials.
Furthermore, it is essential to have an emergency fund if you already have debt (such as student loan debt, credit card debt, etc.), since it may assist you to prevent additional money from being borrowed.
If you do not save for your emergency and you lose your job or have to repair your house or vehicle unexpectedly, the unanticipated cost may be catastrophic. You may have to skip payments on your bills or debts or pay your vehicle for the bill without additional costs.
An emergency fund provides you a feeling of comfort that knows you have saved some money so that unexpected expenses don’t wreak your budget down or compromise your investments and possessions.
Also Read: Importance of Finance Planning For Students
Why Should Creating An Emergency Fund Be A Top Priority ?
If you are in debt, it’s tempting to spend all your additional income on the payment as quickly as you can. Depositing money for an emergency fund may seem like a stupid waste if you pay high interest on your money.
However, while it may seem like poor maths, even when you’re still in the red and have credit cards or any other debts you should start saving funds for an emergency.
One of the main reasons why crises can be saved is because emergencies will occur. Cars or home appliances inevitably collapse, children get unwell or other unexpected costs arise.
When you have no emergency funds, then you have no option except to go into debt to cover the unexpected cost. This continues with the debt cycle in which you are and may not be moral if you attempt to repay what you owe.
If your debt repayments progress is undermined by making new charges on your credit cards, it may kill your momentum and make it so much tougher to make early debt repayments aggressive.
The ability to create an emergency fund may offer you a greater sense of control over your whole life and make you understand why should creating an emergency fund be a top priority.
Also Read: Is It Safe To Invest In Stocks – 7 Fun Facts About Stock Market
What Is The Best Investment For Emergency Funds ?
The main aim of your emergency fund is to assist you without delay if you need it most. While some situations may allow you to plan for a few hours or days, others may need funding right now. The routes that you choose to store your emergency money should thus be very liquid and readily accessible.
Because short-term crises require high liquidity investments, it is preferable to invest in a liquid fund.
Concerning liquidity, liquid funds provide immediate redemption.
Ensure that you access the money quickly, conveniently, and without a withdrawal penalty when choosing liquid investment alternatives. Most financial experts do not suggest that your emergency fund be invested in the stock market since equities are volatile.
The most important thing to bear in mind when deciding where to park your emergency money is to be able to meet unforeseen expenditures.
This is why an emergency fund is supposed to be liquid. When you need it, you should be able to withdraw the money without delay. At the same time, you should guarantee you are not penalized in the form of a pre-withdrawal or departure charge.
Some of the possible choices are:
- Cash
There’s nothing like cash for emergencies. However, it may not be the best way to take account of security and null return on a large quantity of accessible money.
- Savings account with a sweep-in facility
Sweep-in accounts enable you to have an installation where the funds are routed into a fixed deposit beyond a specified limit. However, if you ever need cash, nothing prevents you from withdrawing any amount of fines after payment.
- Short-term, fixed deposits
You may open your bank with short-term fixed deposits if you are concerned about squandering money stored on your savings account. It would be helpful to study the terms and conditions before establishing a deposit account while selecting this option.
- Liquid Mutual Funds
Liquid Mutual Funds invest in assets with short-term fixed incomes such as certificates of deposits, term bills, etc. Liquid funds are somewhat more profitable than fixed deposits and more liquid.
How Much Should I Put in My Emergency Fund Per Month ?
While the amount of your emergency fund varies based on your living style, monthly expenditures, income, and dependents, the rule of thumb are to put off expenses of at least 3-6 months.
This may sound overwhelming at first, but the objective is to take a little amount of money away to achieve this goal every week or two.
Most financial gurus suggest that you have basic living costs in your emergency fund anywhere between three months and six months.
You may even split your emergency money into two groups.
- Long-term emergency financing
In big situations such as a huge natural catastrophe or a sudden medical emergency, here is where you save. This money should be invested in products that enable you to get a little higher interest rate but may take a few days to liquidate.
- Funds for short-term emergencies
This is the money that you run to in crises. Such a fund should provide little in terms of income but enable quick access, which may be enough until you get access to your long-term emergencies in severe circumstances.
Reasons For An Emergency Fund
Every day, we all face emergencies. Whether it’s a car breaking down, an unexpected bill, or just needing some financial support in an emergency, people always need money for these types of emergencies. But what are you supposed to do if you have no money? There are a few different things you can do to get yourself and your family ahead in case of an emergency.
First and foremost, consider getting a payday loan. payday loans are often used when there is no other option and they can help cover the costs of pre-paid cards or withdraw cash from bank machines quickly.brooklynCreditUnion has many payday loans available in Brooklyn so find one that fits your needs!
Another good option is to get short-term finance from a lending institution like Primecash Loans. This type of financing is typically used for small expenses that don’t usually require more than 2 weeks’ worth of repayment.
Final Words !
The establishment and maintenance of an emergency fund not only provides you with a security net in financial crises but also helps to change your thinking about saving money.
While living below your means may be a challenge, you will be glad you did when that rainy day comes and the overall effect on your financial well-being is modest. Bad things may happen to anyone and striving towards financial health should be as important as taking care of your physical health.
In this manner, you will not be tempted to make everyday purchases with your emergency funds. By reading this article, “why should creating an emergency fund be a top priority”, I hope you have got all the questions answered which you may have in your mind.
