Why you should have an emergency cash fund
Virtually everyone encounters unwanted challenges once in a while whether you want them or not. How they affect you now depends on how prepared you are to handle them. Setting up an emergency cash fund can help you take care of unexpected expenses and maintain financial stability.
It’s possible to lose your job, or incur a huge business loss, or even fall sick – even though you don’t wish for these things. If you don’t plan for such difficult times, they will most likely take you out of budget when they eventually come. Let’s consider what an emergency cash fund is and why you need it.
What is an Emergency Cash Fund
An emergency cash fund is simply money set aside to handle unforeseen expenses. The expenses could rise from unplanned bills, unfortunate events, or economic crises. It’s just like insurance, but this time around, you’re saving the money yourself.
Why You Should Have An Emergency Fund
There are many reasons why having an emergency fund is important for you. Some of the benefits include:
You have peace of mind when you know you’re covered against possible financial distress. For instance, if you lose your job now, an emergency fund can help sustain you financially until you get a new one.
Having some spare money to handle emergencies will help ensure that you don’t just dig into the money set aside for something else to solve another problem.
Encourages Savings & Investment
From consistently saving for emergencies, you can develop a better discipline for savings that can help you in other areas of your personal finance.
Also, emergency funds lift some burden off your savings and budget so you can have more financial space for investments.
With a well-planned emergency fund, you will most likely not need to borrow to settle bills when difficult times come.
How To Raise an Emergency Fund
Your financial stability depends not just on planning, but on the corresponding execution of plans. Here are a few steps to set up and manage an emergency fund.
Project How Much You Need
The kind of unforeseen expenses you’re likely to expect determines how much you can budget for an emergency fund. For instance, your emergency fund when you don’t have a car should be different from when you own one. You can analyze your previous experiences and current circumstances to have an idea of what to save.
Get a Savings Plan
If you have an estimate, the next thing is to draw a plan for the funding. One of the easiest ways is to allocate a certain percentage of your regular income to your emergency fund. You can also push some random bonuses into the emergency fund.
To ensure consistency, you can set up a separate account for it and automate the withdrawal of the regular fund contribution into the account. It is best practice to ensure that the account is accessible for withdrawal at any time; you never can tell when the money will be needed.
Stick To Your Goals
What makes your plans effective is strict adherence to the execution of the plans. You can be flexible if need be, but make up your mind on the purpose of the emergency and stick to it.
If you’re not disciplined, you may end up diverting the funds into another thing and bear the consequences later.
Emergencies are part of life no matter how unpleasant, so it only does your finances good if you plan for them. It is always easier said than done, so make sure that you strictly follow the plan when it comes to your emergency cash fund.
Also Read How to set and Achieve Financial Goals