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4 Reasons You Need an Emergency Fund

Apr 27, 2021 | Finance

If there are two things financial experts would advise their clients on that are most crucial to gaining financial freedom, it would be to one, pay down your debts and two, start saving an emergency fund (if you haven’t already).

The idea behind paying off your debts is simple: the faster you pay them off, the more money you’ll save on interest and the better you credit score will be. But most people may not understand why it’s just as important to have an emergency fund. After all, it won’t improve your credit score – and it won’t earn interest, unless you invest it. So why are they so important? The answer is simple: your emergency fund covers you in the event of an unexpected financial emergency, and can help prevent you from going into debt! So, here are four key reasons to start an emergency fund.

You just started budgeting

When you first begin budgeting, you may unintentionally leave out a few expenses you may actually need to plan for. But that’s ok – an emergency fund can cover some of these expenses for the first few months. As they come up, you can start adding these expenses to your budget. This can be anything from annual expenses like taxes or even smaller items like gifts or subscription fees.

The bottom line is your emergency fund can help you out as you adjust your lifestyle to fit your budget.

You’re trying to pay off debt

An emergency fund can help to stop adding to your debt whenever there’s a financial bump in the road. An emergency fund can help cover the cost of things you don’t typically budget for – like car and home repairs for example. You can use an emergency fund to handle financially stressful events and make it easier for you to stay out on debt.

You’re saving for a goal

If you are working toward a goal like buying a home, vehicle or starting up your own business, an emergency fund can stop you from having to dip into your savings when those unexpected expenses come up.

This is a great way to ensure that you continue moving forward toward your goal. You may feel that having to rebuild your emergency fund is slowing your progress – but keep in mind that by doing this, you’re really protecting your savings.

For a rainy day

Let’s face it, sometimes things happen and we’re not prepared to cover the unexpected expenses that follow. People lose their jobs, get sick or injured, or discover that their home needs a major repair and they don’t have the financial means to cover it without going into debt.

Life can be pretty unpredictable, and the truth is – things go wrong sometimes. But it doesn’t need to impact you financially. Which is why it’s so important to start building an emergency fund for when those unexpected expenses creep up on you.