Why Is an Emergency Fund Important?

When you begin your personal finance journey, there are many terms thrown around that you may not be familiar with.

One of the most important topics in personal finance that everyone should be familiar with is the emergency fund. It is also one of the first things you should take into consideration when creating a budget and saving money.

What Is an Emergency Fund?

An emergency fund is a savings account with money intended to cover life’s expenses. It is a separate account than other savings accounts (such as a vacation savings account) and is meant for unexpected expenses.

You can think of an emergency fund as an insurance policy of sorts. You are actively putting money aside to cover an unforeseen expense that you wouldn’t otherwise have the funds for.

When things come up—such as an unexpected car expense or household repair—an emergency fund can cover it. The intention is to have money set aside in case there is a financial emergency, instead of dealing with it when it arises.

Realistically, everyone will experience a financial dilemma at some point in their lives. It is bound to happen. When you have the money set aside to weather that financial storm, it will likely seem less severe.

It’s Beneficial During Layoffs

Unfortunately, people lose their jobs and experience layoffs. Outside of job loss, there are many reasons that a person wouldn’t be working for a period of time. A solid emergency fund can help fill in those gaps while you’re looking for another source of income.

Financial experts recommend three to six months worth of expenses saved up in an emergency fund for a person with a stable income and low debt. This recommendation fluctuates depending on your financial situations (i.e. self-employed or retired).

Financial Emergencies

The first financial emergency that likely pops into your head includes either a home or car repair. But studies show that Americans currently carry $195 billion of medical debt.

A medical condition, an illness and hospital visits can add up over time. Even with medical insurance, medical bills can accumulate.

Avoid Debt

One of the biggest perks of an emergency fund is having the ability to avoid going into debt. When you have money saved up, with the intention of using it for a financial emergency, you are less likely to put those expenses on a credit card or take out a personal loan.

Keeping your credit card utilization low is also a great way to boost your credit score.

When you’re ready to open up an emergency savings account and work on your personal finance goals, we are here for you! Contact us today to begin saving for a rainy day.