Why It’s Important to Have Emergency Savings
During a time of crisis, many things can seem unpredictable. One factor you can always rely on is your emergency savings to help you stay financially afloat. An emergency fund can help you face major expenses that could put a heavy dent in your savings. Doing so could prevent you from taking out loans.
An emergency fund is something you should start as soon as possible, seeing you’ll never know when a potential emergency can show up.
People have different ideas about what an emergency will cover, but it’s important for you to have a clear idea of what an emergency entails to you. Below are some possible instances where you could make use of an emergency fund.
#1 Sudden loss of job
A sudden loss of a job means a sudden loss of income. Your savings will now be essential to pay for your necessities as well as any bills while you get back on your feet. Ideally, it’s generally a good idea to have at least 6 months’ worth of income stashed in your emergency fund.
Once you find yourself a new role, you should aim to refill the pot again.
#2 Unexpected medical emergencies
A medical emergency could encompass a variety of situations. These include everything from sudden illness, accidents, or medication. In some countries, you’ll even have to consider hospital or doctor expenses for the appointment, procedure/surgery, and stay. Some situations may also involve constant monitoring so you may need a routine check-up.
#3 Natural disasters
If you happen to live in an area prone to natural disasters or hazardous weather conditions – such as hurricanes, floods, blizzards, and earthquakes – setting apart some money when occurrences hit can be vital. You may use these funds to find emergency accommodation, groceries or major repairs.
#4 Major repairs
Bouncing off the previous point, major repairs come in many shapes and sizes. These can come in the form of upgrading old parts or meeting safety requirements or sudden repairs such as a broken boiler or an engine failure.
How do you start an emergency fund?
There are a few methods to begin setting your emergency savings. Ideally, the first step should figure out how much of your disposable income can you afford to set aside. Many experts believe its ideal to place 10-20% of your disposable income into savings. While that may not seem a lot, over time it can build a sizable account, especially if you consistently set aside each month.
The second step is where you will hold your savings. Here you have a few options including in a savings account, at home, an investment scheme or others. Depending on your options and choice, it should be hidden away from the temptation of spending; and if left at home, should ideally be well hidden away from burglary.
For a more secure method, one should be saving in a bank or investment to save money from burglary or from natural disasters. If saved into an investment scheme, you could earn compound interest over time which will yield more money, however, you should note you could also lose money.
This blog is not intended to be financial advice, but to increase awareness of the benefits of an emergency fund. For any investments, you should seek independent financial advice from an independent financial advisor. Lendwise Ltd is not responsible for any capital losses.
If you require assistance looking for a financial adviser, see our post for more information.
Summary
Life is filled with a series of unexpected events and with the constant rocks flung into your plans. One of the best things to do is to stay one step ahead by creating an emergency fund for such events, which you can rely on in times of need. While it’s not a foolproof plan, it can still aid you without taking much from your savings.
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