Even the most well-designed plans can go wrong since certain factors are beyond your control. One moment you are sailing through life, and the next moment either you or your loved ones are fighting for life in the intensive care unit of a hospital. Your carefully built investment for your retirement or your child’s higher education could be wiped out in an instant.
Sounds familiar? If it doesn’t, then you’re among the lucky few who haven’t experienced an emergency. Instead of worrying about when your luck will run out, gear up for an emergency by creating a fund.
Here are some essential reasons why you need an emergency fund.
Table of Contents
Hospital Bills:
A serious medical condition can occur at any time and comes without warning. If you are insured, you get some respite. Complex surgeries can burn a hole in your pocket, and you should set aside a certain portion of your income for medical emergencies.
In these cases, a small loan can be a big help. These loans are interest-free and help you tide over a temporary crisis. You should avoid payday loans since they charge a hefty interest and need no guarantor.
Job Loss:
With the economy going through a crisis, job security is rare. You could lose your job because your company could be cutting corners due to low business volumes. There might be a disagreement with your boss leading to the termination of your job.
Since you pay your monthly bills with your salary, losing your job means not paying for your routine monthly expenses. Your emergency fund should be sufficient to cover at least 3 to 6 months of expenses, depending on your job’s nature.
Natural Disasters:
Whether it’s the wildfires in 2018 or the flooding in 2019, the UK has been hit by natural disasters throwing life out of gear. These incidents can’t be stopped, and all you can do is prepare yourself for them, mentally and financially.
Natural disasters may be covered by home insurance, but you need funds for temporary accommodation, food, and other costs. This period would depend on the extent of the damage you have suffered. An emergency fund helps you handle such disasters till things return to normal.
Divorce:
Apart from the emotional impact of a divorce, there are financial consequences as well. If you need to make a payment to your spouse as part of a prenuptial agreement, it could add up to a huge sum. While a divorce is undesirable, it is a reality you should be prepared for.
You should create an emergency fund equal to the value mentioned in the prenuptial agreement so that in the unfortunate event, you go for a divorce; you don’t need to go bankrupt.
Big-Ticket Home Repairs:
Even the best homes have problems due to wear and tear. It could be your roof, water heater, pipes, wiring, or AC. Like any other emergency, they come without warning.
Not only do they disrupt your daily routine, but they also set you back by a few hundred or thousand pounds along with stress as a bonus. With an emergency fund, you are financially prepared to handle such emergencies, and the inconvenience caused due to the repairs won’t hurt you that much.
Avoiding Debt:
An emergency fund also protects you from taking expensive loans to pay for your debt. Whether you use credit cards or a personal loan to pay off your dues, you start building debt. With the high rates of interest charged by these products, you soon find yourself in a debt trap.
If you have an emergency fund, you won’t need to apply for a loan or a credit card. However, if your emergency funds are not enough, you can get help for paying bills with small, interest-free loans that can be repaid at your convenience.
Fluctuations in Business:
Every business has its share of ups and downs, and your business won’t be any different. When your business is raking in super profits, set aside a percentage of your gains and park it in an emergency fund. Things might not go your way shortly, but you would be prepared to handle any crisis with an emergency fund.
Most importantly, you won’t need to take any extreme steps like winding up your business if you have created an emergency fund. It gives you time to think about alternate strategies to revive your business.
Protecting Your Financial Goals:
Your financial goals are constantly under threat from emergencies. The reason is simple; if there is an emergency, your investments need to be liquidated to pay for those emergencies. When you prematurely liquidate your investments, you fail in achieving your financial goal.
Long-term investments benefit from the power of compounding and if you disturb them, getting your goal back on track is an uphill task. With an emergency fund, your financial goals are secure, and you can reach the goal in due course. Remember to replenish the emergency fund when the emergency is over.
Car Repairs:
While car accidents may be covered by auto insurance, car repairs are not. Servicing your car can cost you anywhere between GBP 80 to GBP 400, and that is just for regular repairs. Significant repairs cost much more.
With an emergency fund, you can comfortably get your car repaired and pay for the temporary additional transport cost. Your job or your business does not suffer due to this crisis.
Death in The Family:
Whether a family member’s death is expected or unexpected, there are costs involved apart from hospital bills. These include burials and the ceremonies that are part of the rituals. All these are expensive affairs, even at the primary level.
With an emergency fund, you can smoothly get through these ceremonies and plan them well. While the grieving process will take its ordinary course, you won’t need to worry about these rituals’ financial aspects.
Final Thoughts
An emergency fund is your lifeline. Whether it is a significant hospitalization, job loss, or your financial goals, this fund is your true friend for life. The most significant benefit of an emergency fund is that it provides peace of mind.
You don’t need to constantly worry about how you will handle an unexpected adverse event. The magnitude of the event is not significant here; your preparation for it is. If you haven’t started your emergency fund yet, start building one today and enjoy a stress-free life.
About Carson Derrow
