Life is unpredictable. And many emergencies take place when you are the least prepared for it. While you can get rid of a problem but the financial aspect of the problem may linger on. These emergencies can severely impact your budget and credit score as well.
Hence, it is important to have an emergency fund in place that will help you to tide over these situations. If you are the sole earning member or staying alone, then you should have a substantial amount of savings in your emergency fund. You can build a corpus with nearly a year’s expenses. An emergency fund with six months of expenses is a good starting point.
Most of us live from paycheck to paycheck. Hence, a job loss can come as a big blow. Whatever is the nature of the job loss, you may have to remain jobless for a few days or months. While you may be jobless, there will be some fixed costs that you have to meet.
A recent example is the situation of the employees of Jet Airways. Layoffs have also become frequent in the IT sector and e-commerce businesses as well.
An emergency fund will make sure that your regular expenses such as rent, utility bills are met. It will allow you to look for the right job rather than hastily saying yes to any job.
If you have your vehicle, with time many problems may creep up. Also, repairing your vehicle after minor accidents can be expensive on your pockets. Rather than withdrawing money from your regular savings account and disturbing your monthly budget, you can use your emergency fund.
If you are staying alone in a city in a paying guest, you may need to look for a new place to stay at short notice. Brokers will give various reasons to kick you out of the place. And, in this scenario, you can’t do much other than looking for a new place. But looking for a new place is not easy. Even if you find a house, you have to incur huge costs as deposit, brokerage and the monthly rent. An emergency fund comes to aid in such a scenario.
Just like cars, houses also prone to wear and tear. The roof over your head may crumble or your bathroom pipes may break creating havoc. Fixing these house repairs is not cheap. You may have to pay the plumber, pay for the tools and other required things. An emergency fund can help you in such circumstances.
If you are trying to get out of debt, emergencies may push you further into debt. With the easy availability of instant personal loans, advance salary loans and credit cards, you may be tempted to take care of the emergency by taking credit.
So, create an emergency fund if you are planning to stay out of debt and increase your credit score.
Without an emergency fund, you may dip into your savings earmarked for other financial goals. You may break the fixed deposits that were meant for your vacation. As a result, you may now take a longer time to fulfil the goal or postpone it by a few months. This approach is not healthy and beats the whole purpose of planning for your goals. Hence, you need to have an emergency fund.
If you live in a different city away from your family, there may be days when you may have to rush back to your home. And, an unplanned flight back to home at the last moment is expensive. So have an emergency fund for urgent trips back to your home town.
Health care is expensive. While health insurance will take care of the major part of the medical bills, it comes with various terms and conditions. Hence, there will be elements that are excluded from insurance. You may fund for these expenses from your pocket. Keeping an emergency fund will help you to cover the extra costs.
Death is inevitable. After a person dies, their family has to take care of the funeral costs. Funerals are expensive rituals and it may pinch your pocket. The term insurance will take care of the costs but it won’t be reimbursed instantly. Hence, it is important to have an emergency fund that will take care of the funeral.
An emergency fund is an important and essential part of financial planning. Creating an emergency fund is the first step that everyone should take. These were some of the reasons that make emergency fund important.
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