Emergency Fund

What Is An Emergency Fund?

Emergency fund refers to the spare cash that is saved up or reserved for periods of financial distress. The expenses that come up during these periods can be very overwhelming and challenging to keep up with; hence emergency funds always come in handy.

Deeper Definition

Unexpected expenses, including medical bills, home repair bills, living costs in the case of job loss, vehicle repair bills, costs of handling deaths of loved ones, and so on, usually creep up on individuals unannounced. From there, it becomes an uphill task for individuals to meet these needs, especially if no contingency plan was put in place. Often, people turn to taking loans or making withdrawals from retirement accounts as debts pile up. Still, if an emergency fund were in place, it would cushion the effects of the difficult financial situation for the affected individual(s). Usually, an emergency fund should cover up to 3-6 months of the total expenses of the individual who owns the fund.

Some of the benefits of maintaining an emergency fund are significant reductions in stress levels in individuals, especially as there are lots of risks associated with most of the activities undertaken by individuals like transportation, use of appliances, equipment, devices, and so on besides the fact that job security is not a given in today’s world. Others are the opportunity to avoid panic-induced indebtedness by using high-interest credit cards and the likelihood of users maintaining healthy savings habits and reducing needless and impulsive buying. On the flip side, it puts a strain on individuals’ consideration for investing and lowers the outlay available for individuals to fund other financial goals.

Emergency Fund Example

Suppose an individual has a well-paying job and a family with two dependent parents and a disabled sibling. In that case, it goes without saying that if such a person is a victim of downsizing or redundancy in the workplace, the individual and their family will be badly hit. If there are no backup funds to fall back on, it would be difficult to remain financially secure.