Emergency funds - What Are They And Why Are They a Financial Priority?

Published: October 20, 2022
By the Pachyy Editorial Team
The Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.

Unexpected expenses can happen at any time to anyone, whether it’s a medical emergency, car repair, or legal trouble.

According to a recent survey by Bankrate, only 41% of Americans have enough savings to cover a $1,000 emergency expense. This means that the majority of Americans are at risk of going into debt or borrowing money from family and friends when faced with an unforeseen expense. That’s where an emergency savings fund comes in.

What Is an Emergency Savings Fund?

An emergency savings fund is a sum of money set aside to cover unexpected expenses or emergencies. This fund can help individuals avoid high-interest loans or credit card debt and protect their long-term savings.

Why is having an emergency savings fund important?

1. Emergency Savings Fund Provides Financial Security During Uncertain Times

According to a survey by Bankrate, more than 60% of Americans do not have enough savings to cover a $1,000 emergency expense. This lack of savings can put individuals in a vulnerable financial position, especially if they experience a sudden job loss or medical emergency.

2. Reduces Financial Stress

Financial stress can have a negative impact on both mental and physical health. A study by the American Psychological Association found that 72% of Americans reported feeling stressed about money, and 22% of respondents said they experienced extreme stress. By having an emergency savings fund, individuals can reduce financial stress and have peace of mind in the event of an unexpected expense.

3. An Emergency Savings Fund Can Help You Achieve Your Long-term Financial Goals

Without an emergency savings fund, individuals may have to dip into their long-term savings, retirement fund or 401(k), to cover unexpected expenses. A survey by the National Endowment for Financial Education found that 42% of Americans who have raided their retirement accounts regretted it. By having an emergency savings fund, individuals can protect their long-term savings and stay on track with their financial goals.

How Much Should You Save in an Emergency Fund?

The amount an individual should save in their emergency savings fund will depend on their income level, personal debt, and your monthly expenses. A good rule of thumb is to save at least 3-6 months of living expenses. Moreover, you should consider saving more if you have a large number of dependents (children, elderly parents).   

How Can You Set Up an Emergency Fund?

To get started, decide where you would like to save your money. Maybe you would would like to set up a new savings account with your bank or, maybe you would like to save the money into an investment account. Regardless of where you decide to save your emergency funds, make sure that you will be able to withdraw your savings at short notice. 

Decide how much money you will deposit into the account and how often. Typically, you should deposit money into the account as frequently as you receive your income (every 2 weeks or every month). It is worth setting up an automatic payment system so that you are not tempted to spend your income rather than save it.

What if I do not have an Emergency Fund?

If you encounter a large unexpected expense and you do not have an emergency fund you can consider either taking out a loan or drawing down from your savings / pension fund to cover the cost. 

If you have large personal debts and a sufficient savings fund, you should consider drawing down on your pension rather than taking out a loan. Alternatively, if you do not have sufficient savings or you have little debt against your name, first seek help from friends and family, then consider taking out a loan. 

You can use our free application portal to see if you are eligible for an emergency loan in under 5 minutes. You have no obligation to take out a loan if you apply and applying will not affect your credit score.