Why Investing In An Emergency Fund Makes Sense, Even if You Have Bills To Pay

The wise Confucius once said, ‘The man who moves a mountain begins by carrying away small stones.’ If there is one excellent habit that runs through those who have financial peace of mind, it is saving. Saving for a rainy day, saving for your children’s education, saving for healthcare - the list carries one. Yet, in the hustle and bustle of everyday, the urge to indulge means the fund that will provide a buffer for this just doesn’t materialize. Nothing can be more stressful than having to take care of an ill parent, while wondering how much you are racking up in medical bills.

Emergency by the very nature of it’s name means a crisis of some sort that is unexpected. A little bit of money saved is peace of mind earned. Ideally one needs to save 30% of their income. David Ramsey says a double income family can afford to save three months of their income in an emergency fund. A single income family needs to save six months of their income at least.

Investors may point to the low interest rates saving accounts attract. In case of the emergency fund, the reason is existential rather than earning a profit. An individual or family without an emergency fund is like a coastline without sandbags. True the actual fund requirement may exceed the emergency fund by two or three times but having no fund at all means you are completely unprotected in the face of the crisis. This can derail your life completely, even when the crisis has passed, reducing your chance of bouncing back.

Very often we treat credit cards as our emergency fund. The rates of interest on money borrowed on a credit card averages 34-36%. So at this cost of borrowing funds, paying back a credit card debt can be onerous. Imagine alternatively, if by saving small amounts or as much as can be spared after meeting monthly commitments, we save a certain amount that earns us money, however small. This money kept aside for contingencies will help reduce or not take debt at all for a crisis.

An emergency fund can graduate to a long term saving fund. This fund can help reduce the impact of inflation on savings and expenditure. Saving for a child’s education or marriage or your retirement fund can start now. Savings to these funds may seem long term but unsaved they have the potential to become full blown crises.

Don’t wait for an emergency to start your emergency fund. Start putting aside money, however small the amount into your emergency fund. You will never regret it.