Importance of Emergency Fund


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The general public who have had large and unexpected expenses can probably testify one of the two things: how grateful they were for having an emergency fund or how troublesome it was to find the money they suddenly needed. As with most finance-related topics, preplanning is an important factor in successfully preventing the situation we are all for sure going to face in life sometime.

Emergency fund

An emergency fund is essentially the amount of money that has been set aside to cover life’s unexpected events. The amount will help you to survive for a few months in case you lose your livelihood or have to pay for something unexpected that comes up, without going into debt.

It is like an insurance policy. Rather than paying premiums to a company, you will be paying yourself money that you can use in the near future. The cash can be accessed quickly and easily in case some unfortunate event happens to take place.

It is a savings account that contains money that can be used only in the event of an emergency, like losing your job, facing some sudden medical emergencies or having an unexpected car repair.

Covid-19 pandemic

The coronavirus pandemic has now lasted for months, which certainly could finish or exhaust even the most lucrative emergency fund. Various studies have concluded that the pandemic triggered around 40% of the people who had emergency funds to access them, with 73.3% using half or more of the emergency fund and 29% all of it.

When the entire planet was on lockdown, a lot of people lost their jobs and their incomes. However, what did not stop were their living expenses. The government did launch initiatives in order to help, but that took a lot of time and not everyone was qualified for it.

Amount determination

Various banks and financial experts suggest that you should be saving at least three months’ worth of salary in your emergency fund. Therefore, in case you lose a job, you will have enough money to get by for a few months, until you find a replacement job. However, depending on your income level and preferences, the amount to save can vary.

In case you are in a household of double income, it is unlikely to find both income earners unemployed at the same time. Also, in case you have insurance policies that will cover you for unexpected emergencies, you might be able to get by with the bare minimum. However, everyone should make a point of picking aside at least something for unforeseen circumstances.

In conclusion

Even though it may seem a  bit challenging to live below your means, it will only be helpful for you when you need the funds unexpectedly. The only person you can depend on to get you out of financial trouble is you, not friends, family, government schemes, insurance policies, etc. Anyone can be struck by financial emergencies and working towards financial health should be as important and urgent as looking after your physical and mental health.

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