Not having emergency funds is a huge mistake. In fact, it is safe to say that this is one of the financial mistakes that can come back to haunt you. When you do not have it when you need it the most, you might end up making drastic decisions that can make your situation much worse than it already is. It is actually one of the important things that you need to save up for – just like your retirement fund.
According to statistics, a lot of Americans are struggling when it comes to their emergency savings. More than half do not have enough reserve funds to survive for 6 months – in case of the unfortunate event of unemployment. Not only that, 5 out of 10 cannot afford the cost of a medical emergency while 4 out of 10 do not have the money to repair their car.
These show how unprepared Americans are for unexpected events. We all know that the future is really uncertain. We need to be prepared for any event so we are in a better condition to deal with the problem. Since we live in a consumerist society, there is a high chance that every emergency would require you to pay up. That is the part that you need to prepare for.
2 reasons to have an emergency fund
There are two important reasons why you need to have an emergency fund – and why you need to make sure it is sufficient for your needs.
Stay out of debt
Do not take this the wrong way. There are good reasons why you should go into debt. We are not encouraging you to live without debt because in our society, not using credit will put you more at a disadvantage than when you have one. You just have to learn how to borrow wisely.
Unfortunately, borrowing to pay for an emergency event is not entirely wise. When you are thrust into a difficult situation without the money to get out of it, your initial solution is to borrow money. You either use your credit card to pay for the expense or you go to a trusted relative or friend to borrow the cash you need. But that is not advisable considering your current situation. During unexpected events, everything is in chaos and you are distracted by whatever is happening. That means you are not in the right frame of mind to make smart financial decisions. Your desperation will not make you stop to consider the best options. You will probably be focused on solving the problem immediately.
All of these will increase the chances that you will make the wrong choice. Instead of solving the problem, you have just created a new concern because you have to pay back what you borrowed. If you have an emergency fund, to begin with, this would not have to happen.
Keep the stress away
Another important reason to have enough emergency funds is to help keep the stress at bay. It is bad enough that you have to deal with the unexpected event. The worry, headache, and extra effort required to overcome the situation can be overwhelming. If you know that you cannot afford to get out of that situation, the stress you are feeling is undoubtedly double. According to reports, money and work are among the top causes of stress among Americans. It is not even about having a huge income. Sometimes, knowing that you have emergency funds tucked away for a rainy day can help you relax. Even if the most disturbing or surprising thing comes up, you will not feel as rattled as you would have without the fund.
Without the stress ‘caused by your lack of financial resources, you can focus on solving the current problem that you are in. Your mind will be in a better condition to make decisions. That means it is more likely that you can successfully find a solution to your problem.
Tips when building an emergency fund
Now that you know why you should have an emergency fund, it is time to find a way to be successful in saving up for it.
Admittedly, there are people who have attempted or are still attempting to save up to have enough emergency fund. But not everyone is successful at reaching their goal. There are too many distractions that end up making them fail at saving enough money. To make sure that your efforts will not be wasted, here are some of the tips that you can use.
Set a realistic target
Start by setting a realistic amount to target. There are many reasons why Americans cannot save more money and sometimes, it is because they have set a really high goal, to begin with. Make sure that you do not overexert yourself. It is preferable for you to set a low goal that you are sure to meet. When you achieve that goal, it will motivate you and make it easier for you to bring your saving targets higher. And since you have experienced a success already, it will be easier to motivate yourself to meet the new and more difficult goal.
Choose where you will keep it
Once you have set a saving goal, it is time to decide where you will keep your emergency funds. Will you keep it in cash and put it in your wallet or somewhere around the house? Or will you put it in a bank? Some would put the money in an investment that they can easily liquidate. The option is all up to you. Just make sure that whatever you choose will not be too easy for you to spend. If you decide to put the emergency money on your wallet, make sure you have the discipline not to touch it unless it is for a real emergency.
Think of it as a bill
You can also trick your mind into saving for an emergency fund by treating it like a bill. When you receive a bill, you know that it is something that you need to pay no matter what. It is an obligation. You need to have the same mindset about your emergency fund. That way, you are less likely to miss out on a contribution.
Set the rules
Once you start saving, you need to set some rules surrounding your emergency funds. The most important rule is when is it okay to withdraw from this fund? Is it for a life or death situation? Or can you use it when your car breaks down? You need to define how to use this so you will not end up wasting it. You might end up using it and have it depleted when a real emergency comes.
Commit to it
This is probably the most important tip that you need to follow if you want to succeed in having enough emergency funds. Some people do not start saving because they can only afford to save a small amount. That is okay. Even if it is only small, you have to keep saving. Soon, that amount will grow. You just have to make a commitment to never stop saving until you reach your goal.
In one article, a woman told the story of how her emergency fund was able to help her survive after losing a job. She only had one month’s worth of emergency fund savings. It might not be enough but it ended up being all that she needed. For at least a month, she was able to focus on getting another source of income. And it worked for her.
Obviously, it is dangerous for you to have emergency funds that will only last for a month. But the bottom line is, a small amount is better than nothing. Still, you have to aim for at least 6 months worth of emergency funds. The more you can save, the better it will be for you. Anything in excess that you can save can be put towards your investments.