Making cash reserves for unforeseen urgent expenses is emergency funds. General rule is that 3 to 6 months of essential living must be covered and saved in advance. It must be kept in high yield saving account and budget must be made after tracking income and expenses. Savings is storing money for future use and emergency funds is allocating some cash reserves. When money is used for these expenses like insurance, loan repayment, grocery, rent and utilities – then, we say we have used emergency funds.
What is an emergency fund?
Emergency fund is unforeseen urgent expense as there are many factors like job loss, car/ home repairs and medical expenses come up and we don’t have money for that. So, savings come in use at that time.
Why is emergency fund needed?
Emergency fund is needed to save one from unplanned debt and using long- term investment. For example- you have saved for other goals i.e. retirement – but if you using money after your job loss for running expenses then, you are falling in a financial trap. To save yourself from this circle, one must keep emergency fund handy. Even if you have running balance or high income, it’s still advisable to keep money as savings or in emergency fund.
Some car breakdown happens or you have a leaky roof. Or you lost your job in this season. So, where will you bring money from? This is a difficult situation to go through. So, it’s very much mandatory to keep money aside as emergency fund.
Emergency fund let us keep money safe and liquid. We don’t have to do borrowing from someone. There is no financial pressure and family and own needs can be met. Whenever there is joblessness or less income- to cover the expenses we don’t have to sell SIPs rather one can take use of running checking account saved as 3 to 6 months of emergency fund.
The Surprising Power of Mutual Funds: A Complete Guide for Smart Investors: Savings and Emergency Funds: Your roadmap to Future StabilityBasic savings account
This money has to be in liquid form and not invested in stock or bonds. So, maintain a basic savings account or money market account.
Auto pay check
One has to not start upfront six months payment but can do small auto payments for a certain duration.
Use the account for true emergencies
Use the account when there is large medical bill or burst pipe.
Replenish the account
Start building the account once the emergency is over. Next time you need it, it will be there.
There are many uncertainty or risks in the market or life. Savings will let us use money for difficult time period. We will be saved from debt. This is very helpful for future use of money. Emergency fund will not let us see the bad days or time. Whenever extra cash is there or you have some windfall – start saving regularly from your pay check and have yourself benefitted from storing cash.
Benefits of savings
Financial security
It will all be stable and will not let you get dependent on loans. You can incur expenses during medical emergency or during any urgent expense.
Peace of mind and more control over future
You would be more confident and free from stress as you know you can incur n number of expenses. You don’t require loan from someone and can get rid of debt like situations.
Set goals achieved
Whether you need a vacation, or for education. Whether you need money for small venture or buying a new home. You have ways to explore. You don’t have to depend on anyone. And also can live interest free. As no payments have to be done to anyone.
Early retirement
As you have good amount of money- you can plan for retirement corpus. And during your retirement, you have all the freedom, joy , dignity and self- independence.
Better financial discipline
Good habits attract good habits. Planning, saving regularly and budgeting can save you in lots of ways.
Opportunity to invest
One can save money and invest in stocks, bond, fixed deposit and mutual funds. This can help your money grow.
Future responsibility
Many responsibility whether own or family can be completed. Like children education, marriage or sending them abroad can be done.
Benefits of emergency fund
Protection from urgent expenses
Whether there is home maintenance or car repairs, that has come up. You have all the funds to manage this surprising expense.
Financial pressure
There is no pressure financially as there is no dependency on credit cards, personal loans etc.
This means we are stress free and can take care of expenses without borrowing from others.
Job loss security
You get peace of mind as in the event of job loss or reduced income, you are covering your expenses.
Achieving long term goals
You don’t have to sell long- term investment and break fixed deposits to be precise. As you have enough money for 3 to 6 months altogether in every sense of the word.
Family stability
All medical, travel requirements and family needs can be taken care of by the enough maintained emergency fund.
Emotions and decisions
One can’t think clearly and take stress. They take rushed money decision. When enough funds are there in your checking account as emergency funds to cover urgent expenses – you get peace of mind and can think clearly.
Financial discipline
When you have a habit of saving regularly, then – there is enough money and you can relax at the end of the day.
As a backup
You have all the freedom to take risks. You can switch jobs and careers, take a gap, take a break and all without fearing for financial instability. As to incur car repairs or family responsibility – you already have an emergency fund in place. This is helpful for the future very much.
To wrap up
Savings and emergency fund both can save us from falling in financial dig and help us plan life in many ways making us cover the uncertainty of lives.
