Why You Need An Emergency Fund (And How To Create It)

emergency fund

An emergency fund is a financial safety net for unexpected expenses that are necessary and urgent. The amount in the account depends on your basic living expenses and lifestyle. If you don’t have one,  create your emergency fund gradually, adding money to cover your family’s basic living needs for three to six months.

Why and How to Create an Emergency Fund

We have experienced most of these unforeseen events; sometimes, they happen simultaneously.  Without readily available liquidity, it can be costly to use your credit card to pay for if if you have no other means.

1. Examples of Unexpected Events

It takes time to get a personal loan, and borrowing rates have increased for all loans. If you regularly pay your monthly credit card balance in full, then putting unforeseen expenses on your card may make sense, but consider it a last resort

2. Avoid Adding Debt

For some unexpected events, you may rely on insurance to cover unexpected costs, such as medical expenses.  However, insurance may not cover your whole bill, and there may be a deductible amount you have to pay.

3. Insurance Doesn’t Cover Everything

Even if you have investment and retirement accounts, you may not want to tap them, especially in a volatile market. On the other hand,  personal property, including cars, land, jewelry, art, and antiques, are not liquid assets and should not be relied on for raising cash and may have sentimental value.

4. Forced to Sell Something

You don’t want to withdraw from savings accounts meant for future needs, like 529 savings accounts for college tuition or retirement accounts. These accounts have specific purposes and are beneficial for their compounding growth and tax-deferred advantages.

5. Don’t Withdraw Money From Accounts for Your Future

If you don’t have an emergency fund, you may consider borrowing against your employer-sponsored 401K account if your employer allows this. This should be your last resort.

6. Consult A Financial Advisor

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