When unexpected expenses occur, such as car repairs or a major appliance replacement, most people don’t always have the cash on hand to cover them. That’s where an emergency fund comes in: not only can it make paying for these kinds of items much easier and more manageable. The importance of an emergency fund include:
Peace of mind: The number-one reason for having an emergency fund is peace of mind, knowing that if a person faces a financial emergency, such as job loss or the need to pay for unforeseen health care costs, they have funds set aside to help offset expenses. This can reduce stress on family members during tough times.
Reduced debt: When unexpected expenses arise, they often result in more debt since most people don’t have the available funds to immediately pay for these items. If one has an emergency fund that can cover these costs then they will stay on firm financial footing and won’t need to rely on high-interest credit card debt or a personal loan.
Improved credit: Without an emergency fund, an individual may turn to a credit card for immediate funding of expenses, which can result in making late payments and incurring over-the-limit fees as well as late payment charges. These actions will affect the credit score negatively. If a person has money set aside in a liquid account that can be used in the event of a crisis, they’ll be less likely to overspend on their credit card.
Stability: An emergency fund can keep people from having to take out high-interest loans, such as payday loans or auto title loans, if an emergency occurs and they don’t have money saved. Payday loan interest rates range from 200% to 1,800%. In states where payday loans are legal, borrowers pay an average of $520 in interest and fees for a two-week loan of $350.
Protection from job loss: Unemployment rates have been steadily rising over the past 10 years and a recent study found that nearly 50 million Americans don’t have $400 in savings to cover an unexpected emergency. For those who suddenly find themselves unemployed, having even a small amount of money set aside can help with covering living expenses as they search for their next job.
In conclusion, having an emergency fund helps you stay financially sound through tough times. It gives you the peace of mind that comes from knowing you have a ready source of funds to cover necessary expenses and provides stability in the event of a crisis. Managing unexpected expenses without one can result in high-cost debt, damage to your credit score, missed payments and penalties. Click here if you wish to find out more information about emergency fund.