If you want to improve your financial situation, one of the foundational, and most important things you can do is save an emergency fund. That said, if you’re the kind of person that prefers to spend money rather than save money, it’s easy to let this critical financial task fall down your priority list. But if that’s you, it’s important to remind yourself why you’re saving in the first place.
And in order to do that, you have to start with one question: Why is an emergency fund important?
In short, an emergency fund is important because it acts as a financial cushion in the event of an unexpected expense. Whether it be medical bills, home repairs, or a family crisis, an emergency fund can help you steer clear of debt, protect your assets, and avoid unnecessary financial struggle.
But if that isn’t enough to convince you, for the rest of this article, I’m going to dive into 7 of the main reasons why an emergency fund is so important. So, whether you’re struggling to make your emergency fund a priority, or you just don’t really see the point, keep reading!
1. Peace Of Mind
One of the most obvious reasons why an emergency fund is important is that it provides you with an incredible amount of peace of mind. In other words, when you have a nice big pile of cash just sitting there waiting to jump into action and save you from a financial emergency, you don’t have to worry about unexpected expenses.
Beyond that, when you have that peace of mind, it becomes much easier to make sound financial decisions. Why? Well, it’s simple. When you’re prepared for financial emergencies, it takes a lot of the emotion out of your financial decision-making process. And if there’s one thing I’ve learned about money in my lifetime, it’s that emotional financial decisions rarely lead to good things.
So, to sum this one up: an emergency fund provides you with a sense of financial peace, which, in turn, can lead to better, less emotional, financial decisions.
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2. Protecting Your Assets
Along with the peace of mind it provides, an emergency fund serves another very important role in your financial life: it protects your assets.
For instance, without an emergency fund, if you were to lose your job for the next 6 months, you might have to pull money from retirement, or even pull some equity out of your house to make ends meet.
Meanwhile, if you have a six-month emergency fund, you wouldn’t have to touch any of your assets in order to pay your bills and keep food on the table.
To put it in simpler terms, your emergency fund is the first line of defense when it comes to protecting your assets–and your future wealth.
3. Avoiding Debt
I don’t know about you, but when life hits me with an emergency, the last thing I really want to do is go into debt to pay for it. And that’s why having an emergency fund is so important.
When you stash money into a rainy day fund, you just don’t have to worry about how you’ll pay for an emergency should one ever arise. Beyond that, you won’t have to bury yourself in a pile of debt in order to make ends meet.
Let’s be honest, debt has a unique way of complicating not only your finances but your life for a long time to come. And since dealing with an emergency is hard enough as it is, preparing an emergency fund is one of the most important things you can do for your future self.
4. Gaining Financial Confidence
Do you ever feel like you’re spending all your energy just trying not to fall behind in your finances? This is a little thing I like to call ‘playing financial defense,’ and it can be extraordinarily stressful. In fact, it can be downright defeating.
But the good news is that one of the best ways to break that cycle is to save an emergency fund.
You see, one of the surprising benefits of saving an emergency fund is that it can provide you with a sense of financial confidence. And that newfound confidence has a way of building on itself. Like hitting your first home run, sinking your first putt for birdie, or acing a test in college, conquering the task of saving an emergency fund can give you a much-needed dose of self-belief.
And when you believe in your ability to move beyond financial struggle, you’d be amazed at how quickly your financial momentum can build.
5. Lowering Your Financial Risk
Plain and simple, one of the most important roles an emergency fund serves is that it lowers your overall financial risk. Not only does it protect you from the risk of uncertainty, but it allows you the opportunity to ride out financial storms.
Beyond all that, when you have a big pile of cash just sitting in a savings account, your entire financial life will just feel less risky.
Whether it be a dip in the stock market, an unexpected medical bill, or a pandemic like we have all so recently experienced, having an emergency fund is one of the best ways to shield yourself from all that unsettling financial risk.
6. Improving Your Relationships
One of the surprising benefits I have personally experienced from having an emergency fund is that it can actually help your relationships. From your friends to your family, and in particular, your spouse, having an emergency fund just takes a lot of the pressure off of your relationships.
Seriously, it’s kind of an unintended consequence–the good kind.
Think about it like this, does stressing about money, lacking financial confidence, and worrying about your financial future, have a positive impact on your relationships?
And since an emergency fund is a great way to improve all those areas of your life, then it only makes sense that it would also improve your relationships.
7. It Teaches You Financial Discipline
Over the course of my adult life, one of the most common lessons I’ve had to learn (oftentimes the hard way) is that discipline is the key to success. I’ve also learned that discipline requires a heck of a lot of practice–especially when it comes to personal finance.
And saving an emergency fund is one of the best ways to learn and practice financial discipline.
Not only do you have to be consistent with your budgeting and spending habits, but you also have to learn to let your money sit in savings–which also requires a lot of discipline. Like running on a treadmill to train for a marathon, saving an emergency fund is a great way to practice your financial discipline before jumping into things like investing, saving for a house, or buying a car.
Seriously, the more you develop your financial discipline, the better off your financial life will be. And it just so happens that saving an emergency fund is the perfect training ground.
As just about every finance expert will tell you, saving an emergency fund is one of the most important things you can do for your financial well-being. But rather than just leave it at that, I hope this article gave you a little more insight as to why, exactly, it’s so important.
From giving you peace of mind to protecting your assets and even giving you a dose of financial confidence, saving an emergency fund is one of the key steps on the road to building a strong financial legacy.