22 Aug

The Importance of an Emergency Savings Account

The future is highly unpredictable, making it quite a challenge to plan your finances.  Financial security can be fleeting, especially with all the demands that are placed on ones finances nowadays. With an emergency fund in place, you allow yourself some peace of mind so that you are not caught off guard in the event that you have an unexpected expense.

If you have planned everything¬† in your finances well, you may be wondering what the emergency fund could be used for. Here are some scenarios that could come up: –

  • You need to fix a broken light on your car
  • Visiting the dentist when you get a sudden toothache
  • Replacing damaged clothes and shoes
  • Fixing breakages and so on.

When you consider these emergencies, you begin to realise that your emergency savings account does not have to be one that needs to be filled with hundreds of thousands of dollars. The temptation to dip into this account would be too much. Rather, you should maintain it at a maximum of around five thousand dollars to help you easily deal with things that occur out of plan.

However, there is another type of emergency fund that you can aim to achieve, especially if you are working in a poor economic environment. This is one where you put aside at least half a years earnings to carry you forward in the event that you receive a pink slip and lose your job. This type of emergency fund will help you pay your bills and maintain your lifestyle as you look to find some other sources of income.


What is the alternative?

To truly understand the importance of an emergency savings account, consider what your options would be if you did not have one. To begin with, you may be pushed to seek other financing during an emergency, such as a payday loan. As much as these loans are convenient, the high interest rates mean that they cost you much more than you would expect.


Getting it Sorted

If you are living from paycheck to paycheck, you may believe that it is close to impossible to even think about setting up an emergency fund. In this type of financial situation, it actually is crucial that you do so. Getting started is easy, as long as you are willing to take one step at a time and believe in the process. To begin with, ensure that everyone in your household is on board with you and wants to do whatever is possible to build up the fund. Next, start putting aside small change and any little savings that you make by cutting back on a daily basis. These small amounts are able to accumulate, and over time, you will find that the fund begins to grow. Additionally, you may create one more stream of income by monetizing a hobby or something that you do in your spare time. This way, you will be able to put aside all the income from this venture into your emergency savings account.


With these tips you are well on your way to creating an excellent emergency fund, yet there are some mistakes that you should avoid making. The first one is deciding that your retirement savings can be used for your emergency fund. These are two separate accounts, and you need to plan on how you can fund them separately. Also, avoid using credit cards as your back up for an emergency. They will cost you more than necessary. Make some sacrifices now, and you will appreciate it in the future.

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