Emergency funds - What Are They And Why Are They a Financial Priority?
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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
2. Reduces Financial Stress
3. An Emergency Savings Fund Can Help You Achieve Your Long-term 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.
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