Safety nets are meant to catch you when you stumble. They don’t stop you from falling, but they can help make your recovery faster and smoother than it should be.
So, what financial safety net do you need to have? The answer is an emergency fund.
What Is an Emergency Fund?
An emergency fund is a collection of savings that you set aside for the sole purpose of paying for emergency expenses. These expenses must be urgent and unpredictable, and they can’t be resolved with the help of your regular budget. When you encounter this type of expense, you can withdraw the necessary funds from your emergency savings to recover from the situation as quickly as possible.
As an example, imagine that the water pipes in your home freeze. This is unpredictable and urgent — you don’t want to spend days without running water. So, you call a plumber to safely thaw your pipes and fix the problem. Once your plumber is done, you can pay their fees right away using some of the savings sitting in your emergency fund.
Why Do You Need an Emergency Fund?
The main benefit of an emergency fund is that you can respond to an emergency expense right away. You can react and work to resolve the issue immediately.
Another benefit is that you can manage an emergency expense without disrupting your budget. Withdrawing from the fund should have no impact on your ability to cover essential expenses for the rest of the month, like your bills and your groceries. Everything continues as normal.
And finally, emergency funds offer peace of mind. You don’t have to panic when an emergency expense crops up — you’re ready to pay for it. Having the safety net in your back pocket should eliminate unnecessary financial stress in your daily life.
What Can You Do Without One?
You might not have an emergency fund at the moment. So, what can you do to handle an emergency expense?
You could get a direct deposit loan and use borrowed funds to recover from the emergency. Click here to see the application requirements for an online direct deposit loan to see whether you’re eligible to apply. If you are, you can fill out an application and wait for the response. You just might get approved for the loan when you need it most.
Another option is to put the expense on your credit card and then steadily pay down your balance later on. It’s essential that you do this when your balance is nowhere near the limit — you don’t want to accidentally max out your credit card. Furthermore, there are many users who ask is it illegal to use a business credit card for personal use.
How Do You Build One?
Starting an emergency fund is simple. First, you have to take a close look at your monthly budget to see how much you can reasonably set aside each month for emergencies. Open a savings account — this will be your new fund. Add the amount that you set aside for emergencies into that new account every month.
To simplify things, you can automate your payments between your checking and savings accounts. Automating allows you to continue making contributions without even thinking about them.
As time goes on, your emergency fund will grow and eventually become a strong safety net. You’ll know that it can catch you any time something goes wrong.