There’s one thing you need to save for before you start investing, and that is an emergency fund. Problems happen all the time and a little extra free cash saved specifically for emergencies can get us out a lot of terrible financial situations. Aside from that, it lets us pursue excellent opportunities as well.
Here are a few reasons why you need an emergency fund. (Just think about the last time you thought about these things, and what you would do if any of these ever happen.)
10 Reasons Why You Need an Emergency Fund
1. Accidents and Injuries
What would you do if you got into a car accident? What if some work equipment fell on you and broke some bones? Are you insured? Do you have enough money to pay for hospitalization in case your healthcare or insurance fails to cover your bills? This is one of the primary reasons why we need to have some emergency money in the bank.
2. Illnesses and Disease
Aside from accidents and injuries, we do get sick sometimes and serious illnesses can get worse if we don’t get them treated in time. Do you have enough money to pay for a doctor’s visit and hospital confinement? How about medicine? Do you have enough in the bank to pay for it all without taking on additional debt?
3. Job Changes or Job Loss
Very few people expect to lose their job unless they were warned in advance, and even then they might not have enough time and money to live comfortably until they get back to work. If your company goes bankrupt or your department decides to let you go, would you have enough money to pay the rent, bills, and groceries until you find a new job?
4. Broken Equipment or You Need New Equipment
Some time ago, a power outage fried my brother’s $800 computer and our family needed to take out a loan to buy a new one. On the other hand, when I needed to upgrade my work PC last 2016, I thankfully had more than enough in the bank to upgrade it. Things break down when we least expect them, and very often repairs or buying something new can get very expensive. Just imagine it. What if someone accidentally smashes your car’s window or your indoor plumbing bursts? What if your refrigerator or microwave shorts out? Do you have enough to pay for repairs or buy a new one?
There are also times when you’ll need cash for new equipment. What if your job changed and you need to buy new equipment, like a new uniform, new safety gear, or travel equipment? Do you have enough saved up for those as well?
5. A Close Friend or Relative is in Trouble
In the Philippines where I live, this is one of the most common money problems. People do face hard times, and few are financially savvy enough to buy insurance or prepare funds for emergencies. Because of that, their first option is to ask money from friends and family. While I don’t agree with “lending” (giving) money whenever people ask for it (because you might be supporting bad financial habits), I do support giving financial help for REAL emergencies, such as accidents, illnesses, or other serious financial troubles. Do you have enough to help your friends and family if emergencies strike?
Don’t forget, that friend or family in financial trouble CAN BE YOU if you DON’T have an emergency fund or insurance, so this is another reason why you must start creating one.
6. Kids’ Expenses
Aside from tuition fees, raising kids and sending kids to school can get quite expensive. To make matters worse, some expenses tend to pop up when we least expect them. The need for new shoes, new uniforms, books, school supplies, school projects, payment for field trips and outings, sudden spikes in tuition costs, laboratory fees, vaccinations, illnesses, your child accidentally breaking expensive school equipment, and more. Those kinds of emergencies do happen and it’s best to prepare a little cash buffer for them just in case.
7. A Funeral
Remember how we talked about accidents and illnesses? Now think about the worst case scenario. What if your spouse or your child dies? What if your parents die? What if YOU die? Do you have enough to make sure that your family can survive without getting buried in debt? Can your savings support your family until you get your life together just in case your life insurance gets delayed or you don’t get coverage?
Think about that VERY carefully.
Most financial experts recommend having at least 3-6 months worth of living expenses saved up in a bank, but it would certainly help if you save a bit more for life’s worst case scenarios… and life’s BEST case scenarios as well.
This fund is not just for emergencies. It’s for opportunities too!
8. New Career
How many people get stuck in careers they hate because “they need the money”? What if you DO have the money, and you can take it out any time because it’s not tied down to investments or land? Will that encourage you to resign, take the risk, and land the job of your dreams? It certainly will. That added safety net can mean the difference between a life of mediocrity, and a life that you love.
9. Start Your Own Business
Have you ever wanted to start your own business? Are you afraid of leaving your job because you have bills to pay and you can’t take the risk? Again, what if you HAVE saved more than enough money to start your business AND survive without a regular income for months or years until your business succeeds? This is another reason why you must have some funds saved. You won’t need to wait for opportunities when you can simply BUILD YOUR OWN! (I’m speaking from experience, by the way. This blog became a reality because I used the techniques here.)
10. New Investment Opportunity
No, I’m not talking about pyramid scams. I’m talking about legitimate and proven investments like a working business, a rental home, some excellent land a relative will sell to you at a good price for some reason or another (e.g. they’re moving to a different country, they’re retiring from business, etc.), or something else. Great opportunities like those usually don’t come cheap. Will you have the money to take advantage of it? The best things in life usually come to those who are prepared, so why not have some cash on hand just in case?
Those are just SOME of the reasons why you must build an emergency fund, but that’s not all. There’s a bonus you get from the SAVING HABIT you form while doing it.
After all, before you can have a lot of money saved, you need to build some discipline to stop overspending money or get into bad debts. That saving habit will get you out of a LOT of financial difficulties, including the emergencies I listed here.
Where to Keep Emergency Money?
These are our recommendations:
- Put it in a separate bank account and keep the ATM card locked up. Do not put it in your personal savings or paycheck account, and do NOT put it in the bank account you use for online shopping. You run the risk of spending the money unnecessarily.
- Lock up some of the money, in cash, somewhere safe inside your house. There are times when you’ll desperately need some cash immediately and you’ll have a big problem when all the bank ATMs are offline due to disasters like typhoons, earthquakes, and hurricanes.
Start saving NOW!
We’ll end the lesson here. Remember: Save a piece of your paycheck every month for this emergency and opportunity fund, save another part for investing, and use the rest of your salary to pay for bills and debts. It’s only a matter of time until you develop some good financial habits, and you’ll thank yourself for it later on.
If you want to learn more about personal finance, read our other articles here!
- What to Spend Money On: 6 Great Things You Should Budget For
- Money Problems? The 20 Financial Mistakes You Might be Making
- Investing Money for Beginners: Five Common Investment Vehicles to Check Out