An emergency fund is a reserve you create for meeting your financial needs during emergency situations. The common uses of an emergency fund include job loss, illness, accident, or any other unexpected situation. You can create an emergency fund and deposit money into it each month from your income.
According to personal finance experts, your emergency funds should have enough funds to cover your expenses for at least three to six months. For example, if your monthly expenses amount to $10,000, your emergency fund should have $30,000 to $60,000 to meet your monthly expenses for three to six months.
There are numerous reasons why you should have an emergency fund.
1- Reduces Your Dependence on Loans
When you create an emergency fund and deposit funds into it, you can use it in emergency situations without taking out loans at exorbitant interest rates. You can save plenty of money on interest charges while meeting your immediate monetary requirements. It also avoids the need for utilizing your retirement funds during times of financial distress, allowing your retirement fund to grow without withdrawing money from it.
2- Develops Savings Habits
Creating an emergency fund develops a habit of savings, which can go a long way toward achieving your long and short-term financial goals. Saving money for the purpose of depositing it into your emergency fund requires consistent effort, which depicts that you achieve your savings targets each month. This reduces your dependence on securing financing from external sources as you can easily meet your urgent cash requirements on your own from the emergency fund.
3- Reduces Your Stress Level
Maintaining a fully-funded emergency fund can help you reduce your stress level as the fund would get you covered for three to six months in the event of an emergency. This is a sufficient period for recovering from financial distress and getting yourself back on track.
4- Prohibits Impulse Spending Behaviors
Impulse spending is one of the worst financial habits that you need to eradicate in order to achieve your budget. Contributing money to your emergency fund requires you to save whatever little money you can by limiting your impulse spending. This means that you also develop a habit of reducing your impulse spending in an effort to achieve your periodic emergency fund deposits. Again, shunning the habit of impulse buying would make you disciplined with your spending and allow you to meet your savings and other big financial targets.
Conclusion
Having a fully-funded emergency fund has many advantages. It reduces your dependence on loans that come with interest costs. Further, you develop a habit of saving and reduce impulse buying behavior, which makes it easier for you to increase the amount of savings with a rise in your income. You can lead a stress-free life knowing that your three to six months expenses are covered by your emergency fund.
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