If you know anything about finances, you know that people are always recommending an emergency fund. But, why? Why do you need an emergency fund? It's something that many people have asked over the years. Just because someone tells you need something doesn't always mean you need it. In this case, however, you do. Let's take a closer look at why you need an emergency fund.
Emergencies Can Be Expensive
Whether it's your car breaking down or a leak in the roof, emergencies can be expensive. If you have insurance, your insurance may covers those expenses. However, chances are you have a deductible that you will have to cover and deductibles can be expensive. If you don't have good health insurance, you may also have a medical emergency that costs thousands. You need to be prepared for these things.
An Emergency Fund Can Save You Money
You may thinking, “Why not cover unexpected expenses with your credit card?” The reason is you'll pay for that privilege. Interest rates can be hefty. Not to mention that charging a large expense can have an impact on your credit score (and will leave you in debt). If you have an emergency fund, you can cover the cost of the expense without having to take on any debt. Not to mention that some emergencies can go on for months.
You'll Be Better Able to Survive a Loss in Income
No one expects to be laid off or to become disabled. However, it happens. If you have a good emergency fund, you'll be able to cover your expenses until you find another job or start receiving disability. It is recommended that you have enough in an emergency fund to cover 3 to 6 months worth of expenses. Obviously, this would be the expenses your family REALLY needs, such as food, shelter, electricity, etc. Sit down and add up your necessary expenses. If you're not sure how much you spend on groceries and other variable expenses each month, start tracking your expenses. You want to make sure you have enough money to keep your expenses covered.
An emergency fund may not seem that important. Unfortunately, it usually becomes important to people once they've been hit with an unexpected expense, medical emergency, or even unemployment. Start saving money now so that you can be prepared for the future. You don't have to drop 3 to 6 months worth expenses into your account today, but you do need to start saving now.