4 Reasons why an Emergency Fund is Crucial

The average person has many financial steps they need to take.  They need to make an income.  Preferably doing something that is not soul crushing.  They also need to make sure they are saving enough for retirement.  The government will not bail out the average American unfortunately.

If you have kids, college savings are important since tuition is rising rapidly.  And people also want to have a little fun with their money.  Imagine that.

With all these pressing concerns, the tried and true advice of having an emergency fund can become a second thought.  But it shouldn’t.  It should actually be the first thought and will provide the basis for every other financial goal you’re pushing for.

Here are four reasons why emergency funds are important.  I’m sure there are more than four reasons, but I just can’t think of any others at the moment:

Not having one can derail EVERYTHING: I mentioned retirement and saving for college.  Most people like making regular monthly contributions to these accounts to keep them well funded and growing.  But what if you get hit with a big medical bill?  What if the car’s transmission goes out?  What if the AC decides not to work?

Many people have to stop their monthly contributions to other plans in order to pay for such an emergency.  This means less growth and less money for you in the end.  Sometimes a lot less.  An emergency fund will allow you to keep on your financial path without skipping a beat.

Emergencies are inevitable:  Many people view emergency funds as just a “rainy day” fund in case something crazy happens in life.  The fact is, crazy things happen to EVERYONE at some point in their life.

It would be safe to say that everyone has had some type of financial obligation pop up that was not planned for.  Cars break down, people get sick and pipes burst.  Once you plan that an emergency will happen that will require some cash and fast, it makes it that much easier to save for that inevitable day.

Avoid credit card debt:  Credit card debt is one of the worst debts out there.  But it is so very easy to get into it.  You can’t go to a grocery or department store without being asked to sign up for a card.

Because credit cards are so easy to get, some argue that you should use credit as your emergency fund.  It’s easy to get and many people can get cards with limits of at least $5,000 easily enough.

But the problem is that even if you have every intention of paying the bill off in full, life can come at you fast.  You may be okay paying the minimum payment until you can get some more money.  Once you start down that very slippery slope, it can be very tough to recover.

Avoiding credit card debt is probably the one thing that will give people the best chance to have a great financial life.  And having an emergency fund full of cash will let you do just that.

Peace of mind:  We all talk about wanting financial peace or financial freedom.  Whatever your definition of that is, the fact is that having a solid emergency fund will help you get there.

When you hear an unfamiliar sound coming from your car or you notice a leak from the water heater, you will of course try to fix the problem but in the back of your mind you will know that there is enough cash to cover it.  There is no panic that needs to be experienced.

At the end of the day, peace of mind is one of the signs of someone who is financially free or on the path to get there.

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Comments

  1. Jacki says

    I used my emergency fund when the money that I was expecting got transferred late into my account (blame the Holidays) I used the money to pay for month’s lease and electricity for my small office. That’s the only time I used my emergency fund for other purposes, but my #1 rule is to not touch it as much as possible.

    • Syed says

      That’s a great rule Jacki. If you dip into your emergency fund too often, it just becomes an extension of your checking account! Thanks for the comment.

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