An emergency fund is a chunk of cash set aside in the event of a, well, you guessed it: emergency. It’s a fund that essentially serves as backup in the event that you lose your job, become ill, or experience other unforeseen circumstances that you’ll need money for.
A fully funded emergency fund is an emergency fund that, according to experts, can cover 3-6 months of your living expenses. You can calculate your living expenses by totalling the cost of the essential expenses in your life. These include food, water, housing, transportation, utilities, insurance, and so on.
Why Having a Fully Funded Emergency Fund is So Important
Life is full of unexpected circumstances, so having a fully funded emergency fund is crucial. Below, I’ll dive into some of the specific reasons why it’s so important.
1. Protects Against Unexpected Expenses
This one is quite obvious, but fully funded emergency funds protect against unexpected expenses. Let’s say you lose your job. If you have a fully funded emergency fund, you’ll be able to take a bit of time to find your next job, rather than scrambling to find another one as fast as you can. A fully funded emergency fund acts as a financial cushion, so if you do encounter unexpected expenses and unforeseen circumstances, you’ll have some headway as to what your next move will be.
2. Provides a Sense of Security
Having a fully funded emergency fund can also provide you with a sense of security. Finances can be stressful, but knowing that you have 3-6 months worth of your living expenses saved up is comforting in the event that something unexpected happens. Having this financial security, in turn, could reduce your anxiety, help you sleep better at night, and improve your overall quality of life.
3. Helps You Avoid High-Interest Debt
High-interest debt is debt that has high interest rates. Examples of this kind of debt include credit card debt and personal loans. When you don’t have an emergency fund and you’re faced with unexpected expenses, you may be forced to turn to high-interest debt to pay your bills. When you do this, you essentially dig yourself into a hole of having to pay lots of money in interest. This can lead to a debt spiral that’s often hard to break free from. If you have a fully funded emergency fund, you’re able to turn to that fund, rather than high-interest debt, in the event of an unexpected expense.
4. Provides Flexibility
Having a fully funded emergency fund also provides you with flexibility. This can include flexibility in finding a new job, moving to a new city, and so on. It also provides you with flexibility in the sense of helping you maintain your long-term goals, even if something unexpected happens. Having a fully funded emergency fund reduces the chance of you having to sacrifice your financial goals, such as making a down payment on a house or retiring at X age, even if you’re dealt an unforeseen circumstance.
5. Helps You Build Wealth
Last but not least, having a fully funded emergency fund can help you build long-term wealth, as maintaining financial stability will allow you to invest in your future. For example, if you’re able to avoid paying high-interest debt, you can use the money that you saved on interest payments to contribute to your long-term investments and retirement fund. Having an emergency fund can help you reach your financial goals, and, in turn, can help you build long-term wealth.
Having a fully-funded emergency fund is very important when it comes to your financial well-being. Not only will it help you protect yourself against unexpected expenses, but it will also help you have a greater sense of security, avoid high-interest debt, have financial flexibility, and build wealth.
If you don’t have a fully funded emergency fund yet, that’s okay! However, I would recommend starting to save for it as soon as possible – maybe even today. The time is now, and it’s never too late to start working toward your financial goals!