Emergency Fund Preparedness

Emergency Fund - Why It Matters

Unexpected emergencies happen every minute of the day. Among the forms they take include accidents, illness, natural disasters, and financial crisis such as job loss. Getting ready for the unforeseen takes careful advance planning and awareness. Millions of people stock up on canned food, extra clothes, and flashlights to be sure they are ready in case a catastrophic event occurs. 

When it comes to money, emergency fund preparedness can mean the difference between staying afloat and bankruptcy. In some cases, it can mean life or death. Wise consumers do their best to stay ready before they have to get ready. Not all events can be foreseen, although hard times are inevitable. An emergency fund serves as a financial safety net when sudden expenses occur.

Emergency savings are a lifesaver when an automobile or home needs necessary repairs. If a company is forced to make job cuts, money in the bank will provide the unemployed with daily living costs.

Financial advisers recommend that people shoot for 4 to 6 months of living expenses as an emergency savings goal.

What are some ways to accomplish emergency fund preparedness? Let’s find out!

Why an Emergency Fund is Important

The ability to tap into a reserve of money when a problem arises means priceless peace of mind. The stress that comes when an unexpected crises arises is compounded if there is no ability to pay for resolution of the issue. The problem at hand does not have to be monumental; its impact is powerful if there is no money available.

As an example...

A man or woman suddenly develops tooth pain and realizes they have broken a big chunk of tooth in the back of their mouth. The pain worsens as the day goes on, despite using several over-the-counter remedies. Without dental insurance, the cost to repair the tooth is $1,000, which falls $995 short of their savings account balance. As the stress and blood pressure rise, the pain increases.

Unfortunately, this illustrates a similar state of affairs for millions of people. The example of the tooth is painful enough; how much more painful would it be if the one in pain is a child? A paycheck comes once a week or twice a month. What if something happens in between paydays? 

It is worthwhile to have the security of knowing there is some money set aside just in case.

Emergency preparedness involves:

  • Awareness of the need to save
  • Setting priorities to make good choices
  • Focus on building cash reserves
  • Learning how to save money
  • Being determined to stop making excuses to save

Saving in the event of an emergency is a great incentive to make the effort to change financial priorities. But money can also be put aside for special occasions like weddings, vacations, childbirth, or home purchases in a separate account. Having extra money to help friends or family during a national crisis or natural disaster is another motivation to save. The principles and methods of saving work just the same no matter the reason.

Paying Down Debt

One of the first steps to building an emergency fund is to spend money, but not on shopping sprees. This step is to pay down as much existing debt as possible. Although it may seem counter-productive at first, delegating extra money towards paying down high interest debt is like putting money in the bank. The savings from interest add up to thousands of dollars over time. Once the debt is paid, the payments go right to the emergency fund.

Most people fall into trouble saving money because they have it available on payday. Savings should be automatically deducted to go straight into a high yield bank account. The emergency fund should be treated like a mandatory bill that is due every month (or week).

Paying off debt is a process that takes some time. It is not realistic to think debt will be completely paid off overnight when it took years for it to accumulate. Some creditors will reduce interest rates; it might pay off to ask, since lower interest will reduce the time it takes to get to a zero balance.

Cut Spending

Making savings a priority means choosing to delay purchasing unneeded items. All purchases are either needs or wants. Necessities include shelter, food, clothing, and health related items. Wants can run from a pricey cup of coffee to a round-the-world vacation for two. Total deprivation is extreme; no one should live without spending some money on something they want but don’t necessarily need. But whenever possible, make emergency fund deposits a part of discretionary spending.

Smart consumers use these methods to cut spending:

  • Shopping sales on and offline
  • Using coupons on and offline
  • Using credit cards that offer cash back rewards
  • Taking advantage of rebates from shopping online

There are many ways to adjust spending. With a little imagination, consumers have been able to cut their spending while still treating themselves to something they want. The key to emergency preparedness is to take it slow; it takes time to build a substantial savings fund. Like dieting, starving only leads to binging later.

Windfalls

Unexpected or unearned cash is great! Who isn’t thrilled to get some money from a source other than work? And although a windfall is something to celebrate, it can also be a part of emergency preparedness. Commonly, the average consumer gets extra money from these sources:

  • Gifts from family or friends
  • Tax refunds
  • Employee bonuses
  • Sales of property or possessions
  • Lawsuit settlements

There are some lucky people who inherit money from a rich relative or win big in the large lottery, but they are by far the minority. Since most windfalls are not enough to move a person into the 0.1% club, it is prudent to make a plan on how it will be spent. This includes accepting the possibility of delayed gratification, which produces rewards that last long after the windfall happens.

Being ready for a money crisis avoids becoming a burden on friends or family members if something happens. It also keeps an individual from driving up credit card debt with daily living expenses. It is important to place emergency savings in an account with easy access to funds right away. Also, investments or retirement savings come with penalties, fees, and tax implications that can be expensive. 

The quality of life increases when people make time to enjoy themselves. Preparing for financial emergencies should never make the saver feel deprived. It is entirely possible to strike a balance that is easy to live with. An occasional evening out, shopping splurge, or vacation can be just the relaxation needed to clear the mind to new ideas and fresh motivation that will increase savings opportunities.

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Jenna West

Jenna West has built up a list of published work on various global recognized websites like RE/MAX Canada, Freeman Audio Visual Canada and now carries the title of Freelance Content Manager for Smarter Loans. Jenna adds creative value and fresh perspectives on all things finance, especially pertaining to millennials, and has a natural knack for turning a page full of words into a visual reading experience.