What is an Emergency Fund & Other Things You Need to Know about Emergency Fund

What is an Emergency Fund & Other Things You Need to Know about Emergency Fund?

What is an Emergency Fund & Other Things You Need to Know about Emergency Fund?

People that establish an emergency fund are said to have saved for the rainy day. Emergency fund is very essential in any financial dealing and it is always advisable that people key in to and have an emergency fund. At a point in time, every individual would certainly need some certain amount of money to perform a specific task and if there is no plan for such occurrence, it might be difficult to overcome.

Aside your monthly expenses and needs, there are certain conditions that would warrant you to spend money which will come in form of emergency that requires you spending. It might be as a result of repairing your car or other financial tasks. The great benefit with emergency fund is that you will have peace of mind whereby you can be able to stay calm in the face of some serious stress. If you are someone that has a good job with nice income, you can choose to create a small emergency fund that will help you meet your needs.

What is an Emergency Fund?

This fund is known to be money kept for future purpose or it is regard as a saving account that is been set aside for situation that may come at unprepared time. There are so many conditions that can lead to emergency such as when your car breaks down at a time you didn’t expect or when you need to fix your heat pump because it is not longer working and many other situations. It is very truth that we all experience this condition in our daily life and that is why you should think of having an emergency fund.

When you have an emergency fund, it is being easy for you to take care of some financial tasks that might come up even when you don’t plan it. This process simply means you will be able to prepare for unexpected costs and have a ready source of cash available with you that will enable you cater for emergencies. There are many reasons why you need to have emergency fund and it include; ability to stay out of debt, settle unforeseen emergency expenses, and enable you to replace income in case you lose your job, you will be able to have a peace of mind and probably take advantage of financial opportunities.

Importance of Emergency Fund

  1. In case you lose your job, you can be able to replace your income: This is a good opportunity for you to generate income when you have emergency fund even in a case whereby you lose your job. When you build an emergency fund, you will have tendency to have enough cash that can cover your expenses even until you are able to get another job opportunity.

  2. You will be able to pay for unforeseen emergency expenses: Another great importance of having emergency fund is that you will be able to pay for expenses that you didn’t expect and plan for. You will use the money from your emergency fund to cover unexpected expenses. However, you should be sensitive about this process because some people often use emergency fund to cover non emergency expenses. You should be strict on this issue and treat it with sincerity in order to enable you achieve the dream goal.

  3. You will be able to pay off debt: The joy beneath your ability to pay off debt is a great moment that can help you shape a better financial plan. Having an emergency fund will allow you to have money that can be used to settle debts and in fact you will be able to replenish the balance as quickly as possible.

  4. You will also be able to help those in emergency: Aside the fact that you will have peace of mind when you have emergency fund, it is also possible for you to help your loved ones settle their expenses in case of emergency. This shows that emergency fund can still be useful for your loved ones if they are in difficult time. It might be medical condition or probably at risk of losing a job, whatever the case may be, with your emergency fund, you can pay off the expenses.

How much emergency cash do you need?


The simple truth is that you don’t necessarily need to have thousands of dollars in your emergency cash before you build it. The nature of your lifestyle, dreams, present circumstance and personality will surely determine how much you can have in your emergency fund. Regardless of your circumstances, it is always advisable that you aim at least three months’ worth of basic living expenses. The simple case is that the more you put savings for rainy day, the better prepared you will be when such day comes.

However, it is appropriate if you start small and then increase your savings as much as you can. Even large amount of emergency fund also start from somewhere and with time, it will gain more momentum.

Where can I keep my emergency fund?

It is a statement of fact that your purpose of having an emergency fund is to be able to have cash available when you are in need of it. It might be your interest to keep the emergency fund in a place where you can access it quickly and easily. Meanwhile, it is always advisable that you don’t put your emergency fund at a place that is easily accessible. You can choose to keep your emergency fund in a separate bank from your other accounts.

Simple steps to follow in building an emergency fund:

  • Have a budget: The process of creating a budget would enhance your ability to achieve any financial goal at ease. It will allow you to know the necessary information about your finances, and also know how much you can truly save in a month. At that point, you will effectively set monthly saving goals and design a timeline for the moment your emergency savings will be fully funded.
  • Start small
  • Prioritize your savings
  • Reduce your expenses if possible
  • Increase your income

Image Credit: fool.com
Join our Telegram Channel
Related Posts