Why you should have an emergency fund
Surprises are a part of life. While we can’t control when these happen, just like how we can’t control the stock market, we can manage these ups and downs in a similar way by saving and investing regularly into an emergency fund that is set aside for these unexpected expenses or financial emergencies.
Here are some common uses for an emergency fund:
Health Emergencies
Health emergencies can be costly, and having an emergency fund can help you cover unexpected medical expenses. These might include:
- Medical bills: If you have a serious illness or injury, you may need to pay for surgeries, hospital stays, or diagnostic tests.
- Prescription costs: If you need to take prescription medications regularly, the costs can add up, even with Medicare.
- Other health-related expenses such as the cost of transportation to and from medical appointments, assistive devices, or home healthcare services.
It’s important to note that an emergency fund is not a replacement for health insurance. It is still important to have health insurance to protect against the high costs of medical care. However, even with insurance, there may be out-of-pocket costs that an emergency fund can help cover.
Home Repairs
Unexpected home repairs can be costly. Some examples of home repairs that an emergency fund might be used for includes:
- Plumbing issues such as a burst pipe, blocked drain or toilet. These issues usually need to be addressed urgently and can be an unexpectedly costly amount.
- Electrical issues such as a faulty circuit or a power outage can be dangerous and require immediate attention.
Home Damages from Kids and Pets
If you have small children or pets, they can also be hard on the home! They may accidentally spill things, knock over smashable objects, or cause scratches and dents around the home while playing. While it’s possible to minimise these risks, this can’t be completely prevented as wear and tear is a normal part of life, so having an emergency fund can give you the peace of mind to enjoy your time with your loved ones.
Car Repairs & Fines
An emergency fund can help cover unexpected car repairs such as a blown tire, engine problems, or transmission issues which also usually need to be addressed urgently. Outside of repairs, other unexpected expenses include parking fines and excess premiums for insurance.
Job Loss
Losing your job can be a stressful and uncertain time, having an emergency fund can help cover your ongoing living expenses, such as rent or mortgage payments, utilities, and other bills. It can also help cover the cost of any necessary expenses related to finding a new job, such as transportation or professional development.
This can help you bridge the gap until you are able to find a new job and start receiving a regular income again. Once you have found a new job, keep in mind to rebuild your emergency fund for future emergencies.
How much should you save in an Emergency Fund?
The amount of money you should have in your emergency fund depends on your individual financial situation. Most experts suggest aiming to have enough money in your emergency fund to cover three to six months’ worth of living expenses. Though this can vary based on your income, expenses, and job stability.
For example, if you have a stable job and a low level of monthly expenses, you might be able to get by with a smaller emergency fund. On the other hand, if you have a less stable job or higher monthly expenses, you might need a larger emergency fund to provide an adequate safety net.
Ultimately, the key is to have enough money set aside to cover your essential expenses in case of an emergency, while also balancing the need to save for other financial goals. It’s a good idea to periodically review your emergency fund and adjust the amount as needed to ensure that it is sufficient for your needs.
One way you can build an emergency fund without having to actively think about it is by using Raiz. If you have a specific amount in mind, you can use our Savings Goal feature to set up a recurring investment, or use the round-up feature so that you can save for a rainy day while you are spending for your current day. Please remember to consider the time frames and risk factors involved when determining the right portfolio for you.
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