Why You Need an Emergency Fund

Have you ever heard of Murphy’s law? It’s an adage that says: “Anything that can go wrong will go wrong.” This law applies to businesses and individuals alike as life can be unpredictable.

It’s also why people talk about a plan B so you can be prepared for situations when things don’t go quite right. Surprises and unexpected events will always occur (think COVID), so you should be prepared for them financially as well.

What is an emergency fund?

An emergency fund is a sum of money that you have easily at your disposal, but you don’t use it unless it’s necessary because of certain unpredictable events. The emergency fund is separate from your monthly income as well as any other types of savings and investments.

Typically, the amount of this fund is the amount of money needed to cover all living expenses for three to six months. This money is stashed away in a separate bank account you can easily access but don’t withdraw from because the emergency fund is just for emergencies – situations of serious financial distress that are unanticipated.

What do you need an emergency fund for?

Perhaps you lost your job, your car broke and you need an immediate fix as otherwise, you can’t get to work, you need to do major house repairs, you have a medical emergency, a funeral to attend etc.

Your emergency fund is used for serious things that cost money you don’t have in your pocket right now or that your insurance doesn’t cover. A vacation is not an emergency.

Why do you need an emergency fund?

To give you an example, an issue with the heating of your house could easily cost you €2,000-3,000. With an emergency fund already available, you can have peace of mind that you can tackle this issue without stress.

Having built up sufficient resources to get a solution to a problem will reduce the worry of getting through this unforeseen circumstance and give you ample time to organise and implement your next steps. Having a financial safety net is essential to get through the battle of an unexpected situation even in the case of loss of income.

Do you have an emergency fund?