Why you need an emergency fund

Why you need an emergency fund image

Life is what happens to you while you’re busy making other plans, as the song goes.

So even if you’re highly organised and across every detail, an unexpected curveball can still come your way, and this can often be extremely costly. That’s why it’s always recommended to have an emergency fund in place: your safety net in case you’re hit by circumstances you couldn’t possibly have predicted. 

Unforeseen emergencies are inevitable

Even if you’re meticulous with your finances, you’re always going to face unexpected expenses at some point. For instance, an expensive home appliance might break down and need replacing, or your home could suffer significant damage that has to be repaired.That’s life. 

So if that happens, the last thing you want is to empty your current account, be forced to dip into savings or get into debt to cover such costs. 

Stay afloat if you lose your income 

Countless circumstances could lead to you losing your job or having your income temporarily interrupted. Perhaps your employer is downsizing or changing its business plan. Or maybe the industry you work in is facing the brunt of an economic downturn, and your employer can’t afford to keep you on. If you have an emergency fund in place, you’ll be in a stronger position to make ends meet during the – hopefully brief – period that you’re looking for a new job or dealing with a reduced income. 

Peace of mind 

Money is one of the biggest causes of stress and anxiety, so you don’t want to compound the disruption and trauma of an unexpected emergency by worrying about making ends meet. With an emergency fund in place, you’ll feel a greater sense of security and preparedness, and be ready to face whatever difficulties life throws at you. That, in turn, can help you make better decisions and find the right solutions to a problem. 

Freedom to take considered risks 

Many financial decisions could be termed risky, such as changing your career or starting your own business. An emergency fund can act as a financial cushion during these times of great change and upheaval, and simply knowing it’s there could give you the confidence to make big changes in your life. 

How much money should I have in an emergency fund? 

The amount you should put aside for a rainy day will depend on your specific circumstances. But generally speaking, we would recommend that an emergency fund should contain a sum comparable to three to six months’ worth of your living expenses. Your emergency fund should also be easily accessible, so you know where it is and how to use it if or when that day arises. 

As financial planners, our aim is to put our clients on a firm financial footing so they can plan for the future with confidence. Having an emergency fund in place is one way to do this, so it should form part of your overall financial strategy. Otherwise, you’re at risk of being seriously knocked off course by sudden, unexpected circumstances. 

If you have any questions about being financially prepared for emergencies, please get in touch and we’ll be happy to speak with you. 

It is important to take professional advice before making any decision relating to your personal finances. Information within this article does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain. Ethical Futures llp is authorised and regulated by the Financial Conduct Authority.

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