Life is unpredictable. From job loss to medical expenses, financial security will always be at risk regardless of a person's financial standing. That said, financial emergencies happen when someone expects it the least, and at the very least, it can turn the life of an individual upside down, and, in the worst-case scenario, it can ruin it.
Preparing for financial emergencies is not merely a responsibility but an essential step for anyone seeking stability. Maintaining financial security is vital, particularly in today's world, where factors that can disrupt finances are increasingly common.
At its core, an emergency fund is an individual’s personalized safety net, a dedicated reserve of funds explicitly established for unforeseen expenditures like medical bills, car repairs, etc. It’s different from a person’s funds for vacation splurges. It’s more like insurance to keep their financial security safe.
To delve deeper, financial emergencies are situations or events that constitute an immediate need for money. Unlike unplanned expenses or predictable costs, emergencies require quick action and often require a more significant than usual sum of money. Examples are job loss, major home repairs, significant medical expenses, tuition fees, or legal expenses.
A reliable emergency fund will help individuals deal with these cases without straining their financial wellness. To create an emergency fund, an individual must check all the boxes for their checklist, which they can create independently.
However, to cover all bases, here are some of the things that need to be included in an emergency fund checklist and why they should be in it:
Knowing what the emergency fund should cover is just half the battle. The real struggle is how to start one. Here are 5 steps to set up an emergency fund.
The standard goal for a beginner emergency fund is to have $500 to $1,000. This can cover small emergencies like car repairs or small medical expenses. From here, the individual can work their way up to three to six months’ worth of expenses.
Opening a high-yield savings account is best when setting up emergency funds. This way, they’re more accessible during emergencies and reduce the temptation to spend them. The conditional approval for a specific savings account will also give a person clear insight into their finances, giving a closer look at their financial situation.
Setting up automatic transfers is a good way to ensure you don't forget to build an emergency fund. It ensures you always contribute to your emergency fund without requiring effort or decision-making each month.
Reviewing the budget is a good way to spot unnecessary expenses. Some examples are dining out, subscriptions, and entertainment. The individual can redirect those expenses to the emergency fund instead.
Using windfalls like tax refunds, bonuses, and earnings from a second job or source of income is a good way to quickly build up an emergency fund. The faster an emergency fund is built up, the more prepared a person will be if something unexpected happens.
Setting up an emergency fund is essential for financial stability and peace of mind. Life is unpredictable, and unexpected expenses like medical bills, home repairs, car repairs, etc., can arise at any time. And if a person is unprepared, their financial security will be at risk. An emergency fund acts as a safety net, ensuring that financial security will still be prioritized even in dire situations.
