Building an emergency fund is one of the best things that you can do if you want to secure your finances, but so many people put it off. Instead, they focus on building up savings in other areas without creating a separate account for emergencies.
However, this is a big mistake because an emergency fund protects you against some of the financial curveballs that life throws at you. These are just some of the reasons why you need an emergency fund.
Paying Off Debt
When people have a lot of debts to clear, they often avoid putting money in an emergency fund because they want to pay a higher percentage of the debts. However, if you do not have an emergency fund in place, you risk adding to your debts. When unexpected expenses arise, you can use your emergency fund to pay for them, but if you don’t have one, you will be forced to borrow more and add to your debts. What you should be doing instead is paying down debts and also adding a small amount to an emergency fund at the same time.
Losing your job is always tough on your finances, and a lot of people find it hard to bounce back from. If you are injured at work or made redundant, you may have a payout to help you cover your living expenses for a while, but when that money runs out, you will be in a difficult position. People often end up relying on loans and credit cards to cover their living expenses and then they are saddled with that debt for a long time, even after they get back into work. However, if you have an emergency fund in place, you can use that to cover your living expenses until you find work again, so you do not have to build up more debt.
If you are in a long term relationship, it is likely that you share your finances with your partner. That is fine, but what happens if the relationship breaks down? You will have to find a new place to live and manage your living expenses on one income instead of two, and that is very difficult. But if you have your own personal emergency fund in place, you can use that money to get back on your feet.
Home ownership has a lot of benefits, but it can also be a burden because you are responsible for any maintenance that needs to be carried out. Cosmetic changes can be left until you are able to afford them, but what happens if the roof starts leaking or the boiler breaks down? You have no option but to fix these issues right away, and if you don’t have the money there, you will have to resort to borrowing.
An emergency fund can help to avoid debt and give you a buffer so you can handle anything that life throws at you. If you do not already have one, you need to create a sustainable budget and factor in monthly payments into an emergency fund.