It has been estimated that nearly half of all Americans are currently living without an emergency fund. This means that millions of people are living without any savings that they could use to handle a financial emergency that could occur at any time. Having an emergency fund is a financial necessity if you want to avoid creating debt and be able to build wealth. Here are some of the most important reasons why it is necessary to create an emergency fund.
Funds For Unexpected Expenses
Having funds available for unexpected expenses is one important reason for having an emergency fund. Unexpected events happen to all of us, such as the breakdown of an appliance, damage to a vehicle, higher than normal bills, or expensive medical bills. Not having the funds to pay for these unexpected events can cause a number of different financial issues that could be difficult to recover from. If you want to avoid the financial problems that come with late fees, defaults, and not being able to make necessary repairs, you will need to have an emergency fund established.
Avoiding Debt Creation
Having an emergency fund available will help you avoid creating debt that could devastate your finances in the future. A lot of debt is created by not having cash available to handle an unexpected financial issue, which causes the person to put the cost on their credit card or take out a loan. The interest rates charged for using these solutions inflate the cost of the issue, requiring more money that the person didn’t have to begin with. Instead of becoming trapped in a vicious cycle of debt, put some money aside from each paycheck to create an emergency fund to be used in these situations.
Insurance Against Negative Lifestyle Effects
If you experience the loss of a job or the end of a relationship, the financial changes in your life can be devastating if you do not have an emergency fund. Not having a steady source of income or having your expenses double suddenly often results in dramatic lifestyle changes or the creation of destabilizing debt to continue to fund your lifestyle until something changes. Funding an emergency fund so that you have some money to fall back on in hard times can help you have a more financially secure future once you get back on your feet. If your emergency fund is depleted during this time, replacing the funds used should be your first priority once you regain your financial footing so that the emergency fund is fully financed if some other negative life event occurs.
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I totally agree. For me, emergency fund is also considered as the buffer fund for all the reasons mentioned. Perhaps it must be clearly distinguished from the main long-term savings fund to avoid financial distress.