If your car were in need of repair or you unexpectedly became unemployed, how would this affect you? When you don’t have a financial safety net in place, such as an emergency fund, those unexpected events can set you back. Fortunately, with an emergency fund, you don’t have to take a financial hit that may be difficult to recover from.
What is an emergency fund?
Unlike your regular savings account where you might be saving a portion of your paycheck for a new car, refrigerator or other large purchase, an emergency fund is a savings account that is used to cover the cost of unexpected expenses. When rainy days occur, you can easily use the money in the fund to cover medical bills, home improvements and more.
Like others who have planned for the unexpected, if your financial security is a priority, you can benefit from an emergency fund in a number of ways.
Avoid debt
A personal loan, payday loan, auto title loan or credit card is a viable option when people need quick cash to cover an expense. But with either of these options, you are adding to your debt. An emergency fund keeps you from accruing debt because you will have the money to cover your expenses, unexpected and expected, without having to seek assistance from a bank, credit union or online lender.
Protect your credit score
Things like a missed payment or hard inquiry can negatively impact your credit score. Rather than charging a large purchase that you might not be able to repay by the due date or applying for a personal loan, you can use your emergency fund. Ultimately, you’ll see no change in credit utilization, debt, hard inquiries or other areas that impact your score, which will keep your credit score safe.
Peace of mind during a period of unemployment
An unexpected change in your income can make anyone worry. The bills don’t stop coming just because you longer have a job, so you need to make sure you are safe during an unexpected period of unemployment. Your emergency fund can be used to pay bills and give you peace of mind even though you are uncertain about when you’ll return to the workforce.
Maintain your lifestyle
Not everyone has the same lifestyle, so when you have expenses that take money out of your pocket, cutting back may be out of the question. Things like going out to dinner or taking a vacation may be important to you, and you may want to ensure you maintain your lifestyle should you find you have to factor in an additional expense this month. You have the option to use your emergency fund to take care of the expenses and enjoy the luxuries that you deem a priority in your life.
Provide assistance to a loved one
There may come a time when a loved one needs financial assistance. Your emergency fund is for the unexpected, and while you may want to use the money for yourself, it can be used to help someone who is important to you. Of course, if you don’t want to just give them the money, both parties can consider it a loan and work out the terms of the agreement.
No one can predict the future, so you need to be ready for anything. People may not always consider how one unexpected expense, big or small, can negatively impact them until it happens. Rather than let something like this ruin you financially, have a financial safety net in place and have peace of mind knowing that you can survive the unexpected if and when it happens.
