Having an emergency fund, or a savings account of some kind is one of the most important financial decisions a person can make. While it is possible to survive without an emergency fund, doing so will greatly reduce your quality of life.
The amount of money you put into your emergency fund will naturally depend on your circumstances. As disposable income levels decrease, there will be less cash left at the end of each month to squirrel away into your savings account. However, keeping the discipline of putting even just a few pennies away each month is important for your financial well-being.
You may wonder why you should keep an emergency fund, particularly if your general finances are already stretched thin. Do not underestimate the benefits of having peace of mind. Similar to an insurance policy, an emergency fund can be your safety net when an unexpected expense suddenly appears.
How you use your emergency fund is of course up to you. How you define a real emergency will dictate the frequency that you dip into your savings.
Many people would consider a television, computer, refrigerator or washing machine to be essential home items. They are also large and usually expensive to purchase new. Second-hand items may be cheaper, yet they may not last very long once you get them home.
If you do not have an emergency fund, you are faced with the prospect of either going without the item, or of using money ear-marked for another purpose, or of using a credit card to make the purchase which will then incur interest payments.
Your emergency fund may mean the difference between spending more than you can afford or going without, and having a new fully working, fully guaranteed item as soon as you need it.
Emergency funds are not always about the ability to purchase physical items. If you live a long distance from your family, your emergency fund may be useful to cover travel costs. If a close family member is in poor health, or dies suddenly, you may not have enough disposable funds to cover the cost of travelling to see them or to the funeral. Having funds available in your savings account can be a weight off your mind at a time of distress.
While everyone should attempt to have an insurance policy on their personal home possessions, in reality many people leave this to chance. A reluctance to hand over money to an insurance company should not mean a reluctance to protect your home comforts.
You may be very careful with your electricity circuits or not leave the bath to over flow, but if your neighbours are not so careful you may experience damage to your home if they suffer a fire or flood. Without insurance cover, you will not be able to reclaim the cost of replacing your damaged property. Without your emergency fund, you may have to go without those items for longer as you save up the money to pay for replacements.
Emergency funds can also be useful when you receive an unexpectedly high utility bill. If you experience a particularly cold winter and have your home heating system on higher or for longer than usual, it can be a relief to know that you can cover the extra cost with your savings.
The cost of fuel is not something the individual can easily control. You may be tied to purchasing oil or gas for your home heating system, and these prices can fluctuate wildly in relation to environmental instability around the world. Even if you are not using any extra fuel, you costs may still go up. It can be very helpful to use some of your emergency fund to tide you over, at least until you can adjust your monthly budget to cover these extra expenses.
The importance of an emergency fund cannot be overstated. It can mean the difference between existing and living, or between life and death.