Why you need a Emergency Fund ?
We use this word all the time but do we know the real meaning of it (See below). There is so many situations that could occur in a blink of a eye, car repairs, house taxes, school tuition for the kids,unexpected bills and more.
It is not always a easy task or option to have a emergency fund but let see what are the differents reasons-benefits on how to make it happen for us. Having a budget is the right tool to have!
Source: Copyright Google.com [Definition]
“An emergency fund is a pool of liquid money set aside for unforeseen expenses like a medical expense or a car repair. Having an emergency fund can be the difference between a small bump in your financial life and complete disaster in your entire life. An emergency fund insures against life’s unexpected expenses.“
Discover the Five Reasons.
Reason #1 : The Debt Trap
You are trying to get out of debt but are stock in the same moving train, there is no movement. In our modern DNA, there is a lot of consumers on this earth depending on debt to go on their day by day life. It is understandable that for some of us, it is not even possible to think about a emergency fund.
When we have a unexpected event happening, facing a bad situation , take us by surprise! There is a consequence for not having a saving option, it will put us more into debt and further away from our goal to have a possible emergency fund.
Why not ask your employer to set aside even a tiny little amount in a separate account for you or ask your banker if this option is possible.Money you don’t see is money you don’t use if we don’t count mr credit card. When there is something happening in the futur, your debt payment will not be affected by any emergency coming your way.
Reason #2: One income
Just got married, one is in school and the other partner is working… At the top of your game and starting your working life as a professional,you should set some boundaries with your partner to identify what is really important for the both of you.
Once this is clear, you could work on a tight budget identifying all the spendings occuring during the month and understand how much you have at the end of the month.
As a next step, establish a saving routing of at least 10% of your income so you know that if there is something happening in the futur you are protected but also protecting your partner.It only take one bad situation to destroy a entire family .
Reason #3: Business – Contractor -Online
You are self employed, have your own business and are making good money. When we do have a florishing business,have great employees, good clients,money is flowing we don’t think ahead of time. How do we protect the business when we are in a slow weeks or months?
Should we use the line of credit!
The problem that is occuring a lot is, when there is a lot of money in a company the percentage going to the owner is way more than it should be. A portion of this money should be put in a emergency fund, not toward a credit line but really in a solid option that let you have access to your money right away.
Maybe a investment account could be the right option and have some taxes benefits.( Ask a financial planner or banker).
Reason #4: House and a Home
You do own a house or a car by the same fact and we do know there is a lot going on by owning a house and a car .It is part of life, we do need a roof and a car as a transport (of course we could use public transport,bicycle and more…).There is so many variables around a house and it should go accordingly with your capacity to pay for the house.
- We all know , we should not own a house that is costing more than 40% of our home pay. If it’s more than that, need to find a solution to drop the percentage really quick.
- This is one of the biggest emergency level you will need, because when there is a issue, it will require a lot of funds. Better be ready to face the music,if not we going to endup again in a bad situation.
- I do notice that when purchasing a house or are a first time home buyer ,the bank will offer a option to have a line of credit. To feel more secure in case of a emergency occuring at the last minute.
The reality is, 50% if it’s not more will spend a portion of this amount on things we don’t need or was not related to the house. When the urgency happen ,we have a bad surprise. Maybe to have a smaller house, drive a car that is paid in cash, lease instead of owning a house so you have more options.
Reason #5: Saving
It is difficult to save, there is so much happening at the same time, we don’t know where to look. Dealing with the bills, school,vacations, repairs and more. We should analyse our situation to know what we spend and what we have at the end of the month in our pocket.
Some will have a good surprise and some will go in a defensive mode, don’t understand how this situation got to this level and how to reverse it.
There is maybe a solution called the Envelop system that i use and is maybe the best option you may have to help you save first.For a emergency fund and second to help you save period for any other project you may have. Is it easy to implement? No it is not but it is so worthed to feel the security,the chance to be ahead on your bills and unexpected events.
See my article about : The Envelop System
To conclude on a positive note: If you don’t have a emergency fund, it is ok. The point is,when we do have a emergency happening and we don’t know what to do!!! Take a moment to think for a second, be in the moment and ask yourself what i should do.
If you have to use your credit line, call your sister in law for a loan, raise your credit card limit,look for money in the house… There is nothing wrong when facing a bad situations,the question is when you are in deep water, what actions are you willing to take.
Enjoy life, one day at a time.
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