An emergency fund can be your last hope in case a financial emergency occurs that you hadn’t planned for. Also known as a rainy-day buffer, an emergency fund is for precisely that, emergencies.
An emergency is anything that affects your ability to earn money. It is not a holiday trip or a birthday party. You must never touch your emergency fund for such situations.
It’s always good practice to save for the unexpected. You never know when misfortune will come knocking on your door. Having something in reserve for such rainy days can protect you from going into unplanned deep debts through emergency loans or other high cost, short term borrowing.
Here’s a detailed list of 7 reasons to build an emergency fund:
1. Job loss
This is perhaps the primary reason for needing an emergency fund. Say your boss fires you for any one of the many reasons in the book or you are made redundant, and you don’t have the financial backing to pay for your expenses. The chances are high that your next move will be to apply for loans.
An emergency fund ensures that this doesn’t happen. You will have a stash of cash that pays for your expenses throughout the time that you’ll not be on regular pay.
A good rule of thumb is that you should have an emergency fund that’s large enough to cover for up to six months’ worth of expenses as you look for another job. The average length of unemployment is most often shorter than this, but it’s helpful to have a buffer – particularly if your skills are specialist and not in super high demand.
2. Car repairs
Cars are a huge investment that require regular maintenance. You never know when your car may break down; maybe you have a damaged tyre or the engine stalls. Whatever the reason is, car repairs can leave a massive dent in your pocket.
It gets worse if your car needs repairs, and you don’t have any cash on hand. You may have to park it until your next payday. However, an emergency fund provides you with financial backing to keep your car in good condition.
3. Home repairs
You cannot count on your insurance to cover all major expenses when it comes to home repairs. This is especially true if you have a high excess. In this case, you may have to come up with the cash to cover the repairs yourself. In addition, insurance most often doesn’t cover things that have just degraded over time due to wear and tear. In this case, the onus is on you to cover the cost of repair.
You may need to part with a lot of money to make major household repairs such as a leaking roof. An emergency fund is just the financial relief that you need for such situations.
4. Bigger, unexpected tax bills
If you are self-employed, this is the one unexpected expense that may prompt you to create an emergency fund. A surprise tax bill isn’t what you want on your desk, especially when struggling with your finances. Taxes usually kick in when your accounts are deficient.
Without a large-enough emergency fund, you may end up financially stressed and possibly end up deep in loans to try and offset some bills. An emergency fund should help you in such situations and even get you out of a financial hurdle, at least until you get your finances in check.
5. Funeral costs
No one can ever predict death. Except maybe with a sick or very old relative. There are, however, instances when you are faced with an unexpected funeral. You’re caught completely unaware and don’t have life insurance to cover up the costs. But even this sometimes takes months before you get the money.
Here’s where an emergency fund can be beneficial. Most funerals cost well over £3,000. An emergency fund can help you to start making necessary preparations and payments for the funeral in the meantime.
6. Unanticipated travels
Maybe a family member passes away, and you are forced to buy an exorbitant-priced last-minute plane ticket to get to the funeral. An emergency fund will protect such expenses from lingering on your credit bill, and racking up interest. You can buy a plane ticket quickly and any other bills in preparation for such travels.
7. Emergency pet care
This one applies more to homeowners with pets. Owning pets comes with a few regular expenses. But would you be prepared to fork out thousands of cash if your dog or cat needed surgery? Major pet operations can leave a substantial financial debt, especially if the payment is out-of-pocket.
An emergency fund can cover these costs and not leave your accounts financially strained.
Life is full of surprises. It doesn’t always work out as planned. The question you must, therefore, ask yourself is; could you cope if you were faced with an emergency? Realistically, everyone has bills that need paying and other things that take priority. But either way, it’s still good financial practice to have some cash stacked away somewhere for rainy days.