The Importance of an Emergency Fund

Having an emergency fund it is essential whether in a booming economy or in a recession. Many people have a tough time understanding the true importance of having emergency fund. There are many benefits to having a emergency fund such peace of mind, emergency cash, room for error, making extra payments on bills and etc.

Peace of mind

Many people underestimate this aspect of an emergency fund. Most people think having an emergency fund is just for emergencies, but knowing you have three to six months of savings saved up is important.When saving your emergency fund there is no sense in going beyond the six months if you do not feel it is necessary. When most people save they have a tendency to overextend themselves by spreading themselves thin.

Emergency cash

Besides having peace of mind having emergency cash is good for emergencies. It is important to keep your account separate from everybody. It is up to you if you want to tell your spouse about your emergency fund, but it is better if you both can manage a separate emergency fund. Emergency cash has a lot of meaning but people have a tendency to spend money on things which do not retain value. Look at this way when you are in a pinch selling electronics and things you lose your bargaining power if you are desperate.

Room for error

Emergency cash on hand allows for you to make errors with your finance. Making errors with your finances is not to be encouraged, but it is good to be able to clean up your mess right away as opposed to later. Having an emergency fund allows you to stay on top of things you need to stay on top of. When you are no longer satisfied at your job, you can afford to look for another job which may pay less.

Making extra payments

If you are trying to improve your credit having an emergency fund may come in handy. Dipping into your emergency fund should not be a habit you are comfortable with, but if it is a matter of improving your credit then by all means do so. When improving your credit make sure you make payments to something which frees up cash. I.E if you have a choice between making a car payment and paying down credit card you should pay down your credit card because it frees up money. The only reason the car payment should go first is if the car is going to come off your monthly expenses.

There are many reasons you should have an emergency fund. The reasoning why some many people choose neglect having one is beyond me. Good luck!