Emergencies are situations whose occurrence is beyond our control. Solving these situations mostly requires money.
Not having an emergency fund/plan to fall back on can have a dire effect on your investment. And in difficult situations, it can lead you back into the debt cycle.
To navigate these horrendous situations, it is relevant that you understand the concept of emergency funds and their importance.
What Is An Emergency Fund?
Cash is King is not a myth!
An emergency fund is a fund kept solely for emergencies.
These emergencies can range from:
- Unforeseen Medical obligations
- Major Car repairs
Having funds designated to solve these enormous unexpected expenses gives your investment journey a smoother ride.
It is best to invest in an interest-bearing savings account that is easily accessible. One of the characteristics of an emergency fund is its accessibility – it has to be available at every period.
There are money market mutual funds that make your funds available when you need them. Investing a part of your emergency funds in these mutual funds is not a bad idea, you enjoy higher interest on the funds and can also access it when emergencies beckon.
Now that you know what an emergency fund is, let’s dive into why you need to have it.
3 Important Reasons for Emergency Fund
1. Unexpected Medical Issues
Good health is paramount to the success of your investments.
When unexpected medical emergencies happen, it does cripple the focus of your investments.
Imagine you are so focused on your investment journey that you are not interested in building emergency funds. You have most of your funds in different asset classes – liquid and illiquid. If medical emergencies creep in, you tend to liquidate your funds from these asset classes. You bear pre-liquidation charges for or worse scenario, forced to sell at a loss.
These sorts of emergencies, especially when they are recurring, are best tackled with emergency funds. It takes away the worries around liquidating your investment at the wrong time.
2. Building Target Savings
One way to stay afloat is upping your savings game. A disciplined way to do that is to have target savings.
How do emergency funds help you with that?
If there are emergencies, the first point of call is to dip inside your savings and solve this financial problem. But, when you have emergency funds, your savings are not disturbed as you only have to take from the emergency funds and sort the bills.
It gives you the peace of mind you need and the encouragement to keep up with your target savings.
3. Loan Repayment
Do you have a loan you are servicing?
Are you worried about what will happen to your financial wellbeing if an emergency creeps in while you are servicing this loan?
Your worries are justifiable!
Emergency funds are here to your rescue.
Not having an emergency fund while servicing your debt can cause financial issues that could throw you into a debt cycle. You tend to borrow more to solve these emergencies.
On the surface, emergency funds seem like another financial or investment jargon. Taking your time through the content of this article, you have realized how it plays a relevant role in ensuring your investment plans are intact.
To be investment savvy, building an emergency fund is a must.
Having some funds to solve problems without distorting your investments in other asset classes is key to achieving the level of financial astuteness you want to attain.