What is an emergency fund and how can it save you?
Building an emergency fund is probably the most common financial advice you’ve ever heard about. From the name itself, it is a fund that you are only supposed to use when sudden situations come up. It could be catastrophic weather events, sickness, a family member’s death, or loss of income. These unplanned events are those that often push you to your last resort. That could be about getting a loan from the bank, going into credit card debts, or considering a peer-to-peer lending service online.
Before you take any of your last opportunity, it’s smart to know what else is there to save you from trouble. Having an emergency fund helps your wealth in so many ways. First off, it saves you from worrying about being in debt. So you won’t have to touch your available credit in case of emergency. I hate to say this but borrowing money isn’t always the best option for you. Hence, you might wanna start saving now and see how your fund saves you whenever you feel like you’re in the state of S.O.S.
Once you have your emergency fund, the next goal is to learn the proper ways of spending it. Not because emergency funds are right there, collecting dust and waiting for its time to get withdrawn doesn’t mean you can use it whenever you want to spend an extra. Remember, your reason for saving it is to cover your needs and definitely not your wants. So, never drain your emergency funds unless necessary. After all, the only way funds can save you is by learning when to use and not to use them.
These are things that you should never (ever) spend your emergency fund on.
-
One-time Costs
Some people are caught off-guard on one-time cost payments but it doesn’t mean that you can consider this as an emergency. One-time costs are those bills that you have to pay for at least once a year, such as property taxes and car registration renewals. Since you know that it happens every year, you should also know that you have to prepare a separate budget for bills like this.
-
Holiday Gifts
Another one-time expense that doesn’t justify the use of your emergency fund is holiday gift shopping. Prepare your holiday expense from your regular budget so you won’t have to use your savings for holiday presents.
-
Vacation
A vacation trip is considered as a predictable event that doesn’t require an emergency fund, even if you run out of budget or no matter how much you feel like wearing a new pair of Havaianas. Plan a trip at least five or six months ahead so you can have enough time for saving. And make sure that your savings for emergency and leisure are in separate accounts.
-
Staring up a business
The internet has made it easier for young entrepreneurs to put up an online business for some affordable capital. So you have decided to start up one, thinking it could be easy and at least you have your emergency fund on which to fall back. But this is just another crazy way of draining your fund. I’m not saying that starting up a business is crazy but you might rather pursue your dream for entrepreneurship once you have more from a separate savings account.
While you are hoping for the best, sometimes unfortunate events happen especially when you least expect. It would reduce your worries, knowing that there’s an emergency fund to help you weather a storm so always be mindful about how you use it. Most financial experts encourage building an emergency fund that covers at least three to six months of living expenses, anticipating a major job loss and other emergencies.
