Murphy’s Law states that anything that can go wrong, will go wrong – eventually. If you aren’t prepared for the unexpected challenges that life throws your way from time to time, then you may find yourself in a very difficult spot.
This is why it is important to have an emergency fund at all times. The last thing you want to do is be forced to rely on high-interest short-term loans or your credit cards when you’re in a bind.
An emergency fund allows you to meet unexpected financial challenges and keeps you from getting into debt when you need a bit of extra cash.
Here are 5 good reasons why you need an emergency fund:
- Unexpected medical expenses. You never know when you or anyone in your family will fall ill, get injured or get into an accident. When any such mishap happens, you will need money immediately to cover the expense. Even if you have health insurance, you may still need money for treatments and medication which may not be fully covered.
- Unexpected travel expenses. Imagine this situation: your mother lives in another city 800 kilometres away and you get the news that she’s suddenly had to be admitted to the hospital. Could you drive there? Maybe. But if it’s urgent, you may need to get a train or plane, which costs money. You don’t want to rely on credit cards to pay for such an expensive trip.
- You lose your job. What happens if you suddenly lose your job? It could happen to anyone, at any time. If 2020 has taught us something, it’s that anything can happen! Once you lose your job, the money will stop flowing in and you will have to cover your day-to-day expenses using your savings until you can find another job. If you don’t have any savings, then how will you pay for your mortgage, car payments or groceries? Ideally, your emergency fund will be enough to sustain you for at least 3-6 months while you search for employment.
- Your car breaks down. Like all machines, your car doesn’t make an announcement before it breaks down! Something is always bound to go wrong or require maintenance at least once a year. If you have no money to repair or replace the defective parts, then you will either have to take out an expensive loan or learn to survive without your car.
- Home repairs. Your home may not have as many moving parts as your car, but it is vulnerable to the forces of nature. The doors and windows can become damaged, the walls can crack, the ceiling can leak and the roof can tear. These are all emergency repairs that you cannot plan for. But you can plan financially – make sure you have a fund set aside for unexpected repairs.
Your emergency fund should be kept in a separate bank account that you will not touch unless there is an actual emergency. If it’s too accessible, you may be tempted to dip into your emergency fund the next time something catches your eye. Commit to using your fund only for true emergencies.
Not sure how to start saving for an emergency fund? Our accredited credit counsellors can help you work an emergency fund into your household budget so you can prepare yourself for life’s unexpected expenses. Contact us today for a free consultation.