5 Reasons You Need An Emergency Fund

An emergency fund, or a pool of money to be used only when facing a major, unplanned expense, is an essential part of any strong financial plan. But, why is it so important to have one? We’ve got five reasons that’ll help make it clear that creating an emergency fund is a must.

1. Allows you to invest safely

Investing is a great way to grow your wealth, but it also always involves some degree of risk. You might see your money multiply with a strong investment, but you also may experience some major losses if the market takes a dip. So, if you’re interested in investing your money in stocks, bonds, businesses and more, it’s important to have a safety net to fall back on. An emergency fund can help protect you in the event your portfolio goes through a low period. That way, you can play the long game with your investments and instead rely on your emergency fund to get you through a tight period of time. 

2. Helps protect you in the event of a financial emergency

Financial emergencies, like an unexpected medical bill or car repair, can be very difficult to handle if you’re not prepared. If you face one and you don’t have an emergency fund, you may have to take on high-interest debt to manage your expenses while you recover. Even worse, you may find yourself in a position where you need to turn to a predatory lender to make it to your next pay day. Instead, if you have a pool of money dedicated to handling emergencies, you’ll be able to pay for some or all of the cost of the emergency up front. This can help you financially bounce back sooner and get on with your life!

3. Helps ensure you have liquid cash available when you need it

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You can’t really predict when you’ll need liquid cash. If the bulk of your money is tied up in investments or saved in an account that’ll charge you penalties for withdrawing suddenly (like an RRSP), you still may need to turn to a credit card to make ends meet until you can access your cash. Avoiding this scenario is easy when you build an emergency fund. If you’ve got a pool of money set aside, separate from your main savings account, you’ll never find yourself in a situation where you’re cash-poor and need to rely heavily on credit to get by.

4. Reminds you to live within your means

Saving into an emergency fund serves as a great reminder to live within your means. If you’re consistently setting aside some of your income to move directly into an emergency fund, you’ll have a lower amount of disposable income to spend freely before your next pay day. Beyond that, the act of saving regularly for emergencies will help remind you of how important it is to be prepared for the unexpected. This will also help you be mindful of your day-to-day spending and might encourage you to save even more of what you earn. 

5. Helps give you peace of mind

Finally, you need an emergency fund because of the peace of mind it can give you! Financial stress is all too common and it can have an extremely negative effect on a person’s health, career and relationships with others. By building an emergency fund for yourself, you’re taking a proactive step to prepare yourself for the day you face a financial emergency. But, by doing so, you’re also gifting yourself the comfort of knowing that you’ve got some money to fall back on when that day comes. It’s a simple act of self-care with a major impact!