The Importance of an Emergency Fund

Most people tend to be faced with a financial emergency at some point of their life. So, it is most likely, that you too may have faced such contingencies, or may experience such situations in future. A financial emergency, may arise in various shapes, such as an immediate auto repair, caused due to a break down, or an unexpected medical bill, or a lawsuit filed by your neighbor.

Now, an average American, tends to pull out his or her credit card and pay for such contingencies, thereby increasing the debt burden, which he or she might already be suffering from. In worst cases, they may even not be accessible with credit, which may lead to far worse consequences. In such a situation, a person may be forced to go for high interest loans; by mortgaging his/her assets which may further lead to foreclosure of property.

However, unlike what most people think, one of the easiest ways, is to have an emergency fund at your disposal. So, an ideal emergency fund would be large enough to cover around three to six months of the living expenses. This way, in case you lose your job, then in that case, you would still have enough money for paying your bills while you are searching for another job.

As has been discussed earlier, an emergency fund tends to do a much better job than bridging the gap in between your income. It would serve as a life buoy, which you can look, up for support in times of distress or acute financial emergency. So, in case you meet an automobile accident, then in most probability, your car insurance company would require you to make a deductible payment before it pays out for any kind expenses. In case you lose your contact lenses, then in that case, you would be required to buy a new pair. Problems like these may arise at any point of time.

As a rule of thumb, an emergency fund must be spent on the things, which you really need and not the things, which you simply want. So, your emergency fund should not be bearing expenses like new furniture, when the old furniture is in just good shape, or a new part wear, or even a pack of cigarettes. Make sure, that your emergency fund is there to pay for your true emergencies. For this, the best way is to go by a budget. So, make a budget for yourself, and make sure that you follow the requirements of your budget.