Why Create An Emergency Fund?

  • 2nd Dec'21
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"Money is only important when you don't have any!" – Sting.

We all know that money is almost secondary to oxygen, even though some refrain from claiming that. It allows us to fulfill our needs, wants, dreams and desires. But not all of us understand the importance of saving money. In the world of credit cards, an emergency fund helps you be prepared financially for a rainy day. While every financial instrument has its own purpose and value, emergency funds help you create wealth when you have no financial power. Let's understand what the significance of an emergency fund is and how to create one.

 

Why Do You Need An Emergency Fund?

  • Prepares you for Uncertain Times

During an economic recession like we saw recently in the pandemic, people lost their jobs. The unemployment rate was at its peak, and many struggled to make ends meet. While looking for jobs and upskilling oneself is the right action to take in such times; however, it does not guarantee a quick change in status. Hence an emergency fund can keep you going during such uncertainties.

 

  • Ensures you do not fall Short of Cash

You must carefully plan out how to maintain that emergency fund. There are many personal finance podcasts that suggest interesting ways to get started. The clever way would be to have it all liquid so that you can withdraw it for your needs easily. Also, see that you do not pay interest for taking it out.

 

  • No Dependence on Family and Friends

We all have good people in our books (friends and family) who help us at times with our monetary requirements. But, as charitable it sounds, it's not a good habit. We read examples of people who take such helpful people for granted. People who help you often question you about your investment plans to learn how soon you would return the loan. More often than not, it sours the relationship with such a close group. On the other hand, an emergency fund gives you the power to invest your money any way you decide and earns you the respect of others. 

If you prefer to loan people money during testing times, an emergency fund can take care of it.

 

emergency fund requirement

 

Things to Keep in Mind While Creating An Emergency Fund

  • Have A Savings Plan

Stop depending on your salary and remember the purpose of creating an emergency fund. It could be a short-term or a long-term goal but try neither to be stingy while saving or generous while withdrawing. It's like save it and forget about it! (Not literally, though!) Your fund should be able to take care of at least three-four months of your expenses.

 

  • No-Risk Investment

The point of an emergency fund is to have liquid cash readily available as and when possible. Hence plan out investment strategies or high-interest savings account that guarantees the growth of your money and quick accessibility should be preferable. If you go for other types of investments like mutual funds, cryptocurrency, etc., that will not let you access your money for its worth or may charge you some interest.

 

  • Ensure Having a Goal at Place

To stay motivated throughout the saving process, attach the plan to some goal like your yearly travel, a bigger house, or simply miscellaneous. You have to understand here that the goal should be about the amount you are saving up. So let's say your yearly vacations cost you about $10,000; then, you might want to target yourself to save at least $15,000 by the end of the year. Personal wealth management happens with a timeline that drives you to save better and justifies the significance of an emergency fund; otherwise, the whole idea just falls apart.

 

  • Explore Investment Options

As mentioned in one of the points above, you should look for a low-risk investment plan good enough to give you good liquidity and accessibility. However, long-term emergency funds imply locking in your money for a considerable period, and keeping it all stacked in your savings account isn't a good choice. Hence spread your emergency funds across different avenues to maximize your returns also keeping some liquidity in place. Many investment schemes like bonds, mutual funds, stocks, and real estate could help you increase your emergency funds significantly. If you plan to invest in the stock market, do so backed by good research.

 

funds to grow

 

Change Your Mindset

It is quite tough to imagine a situation where you lose your financial stability, but what's toughest is living through it. That's the reason you must always practice saving early and understand the significance of an emergency fund. Situations can turn around for anyone unpredictably, like the pandemic, accidents, thefts, unemployment, or health complications. Even if you have insurance policies, friends, or families for you, rely on yourself when you can. That must be the first lesson of humanity to seek and preach. 

 

We at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. So, do share them in the comment section below.

Sources/References:

*Note: The content published above was made in collaboration with our members.

About the author:

Supriti Tripathy, OpenGrowth Content Team

A believer of good things and pursuer of diverse avocation, she is a fiction lover and a simple writer. Supriti has a number of professions to her list and she feels challenges are the only answers to failures.


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