How To Use An Emergency Fund To Get Out Of Debt6 min read
Sorting out your budget is a strenuous activity, especially when unexpected emergencies pop up. There’s a way to tackle this without having to rely on credit cards or loans. Start saving for an emergency fund and it’ll be your saving grace.
Emergency funds are the foundation of a strong financial plan. With this, you can be prepared for unforeseen changes or emergencies without the stress of additional debts.
No one wants to contemplate the worst-case scenarios but you should. If you’re not financially prepared to handle an emergency then the aftermath will be worse.
Why You Need an Emergency Fund
An emergency fund is set aside for any unexpected turn of events. You’re not supposed to anticipate this. It’s a safety precaution for the “what ifs.” It’s essentially an insurance measure dealt by yourself.
Here’s why you need to start saving up:
1. In Case You Lose Your Only Source of Income
You may be working in a high demand field and still run out of a job. Having something to fall back on in case you run out of a job is why you need an emergency fund.
How will you pay your bills or buy your necessities without an income? Experts advise to save up at least three months’ worth of wages. This also allows you to look for your next job or project without worrying about expenses.
Assuming you’re out of debt and you’re the single breadwinner of your family, you need to save more than a few months’ worth of income. You also need to build a larger fund if you’re planning to expand your family.
2. You Work on a Contractual Basis
If you’re a contractor or a self-employed worker then chances is, you might face intervals before getting a new project. You also won’t get any unemployment benefits from the government this way.
3. You Live in Your Own Home
Having your own house is nice until you realize how expensive those necessary repairs are. A broken air conditioner, a misplaced pipe or even a nasty mould takes a fair amount to fix.
That added cost is pretty stressful without an emergency fund in hand. Let’s not forget taxes either. So when you’re making a budget, make sure all of this and more is included.
4. Facing a Medical Emergency
You never know when you face an unexpected cavity or an accident that requires you to visit a dentist or doctor. Sometimes medical insurance doesn’t cut it. You might have to pay a portion from your pocket.
If you have a pre-existing medical condition, you can already figure out the costs you need to incur. This doesn’t mean the bills won’t add up. What happens when you have to take a leave without pay?
How Much You Should Save
It honestly depends on how much you’re earning and what the current state of your finances are. It’s best to save at least three months’ worth of income but you should aim to save for half a year.
This is especially helpful if you’re facing transitional unemployment. You can use the emergency fund to pay for expenses. Regardless, start small and slowly build up your fund over time.
It’s best to invest in a high interest savings account that provides easy access during times of need. It shouldn’t be the bank account you use daily. You’ll be tempted to withdraw otherwise.
Strike a Balance Between Creating an Emergency Fund and Paying Your Debt
Many people are misguided by the idea that clearing their debts will solve all their financial troubles. That isn’t true. It’s certainly a burden off your shoulders but it doesn’t come with a stable financial future.
Finding a balance between feeding your emergency fund and clearing your debt is actually the best approach. Even $50 a month is a good start. Just focus on building wealth with baby steps.
Why We Recommend These Books
Trying to pay off your debt as soon as possible may hinder you from building wealth later on. If that statement piques your interest then you need to read this book as soon as you’re able.
The Value of Debt in Building Wealth encourages you to rethink the norm. You’ll understand how to make use of debt to secure the financial future you have envisioned for the future.
Thomas J. Anderson answers the questions that swirl in our minds. He talks about effective ways to save for college and even retirement. He introduces us to ways to accumulate wealth despite having debts.
The book is filled with relatable ideas and content that can help you optimize your balance sheet at the best of your ability. Reading this won’t change the outcome of your choices but it’ll certainly nudge you towards the right direction.
The author highlights the importance of keeping the right debt-to-income and debt-to-asset ratios. Learn about smart debt management and find out how you can get healthier bank accounts even when the odds are against you.
This book is a cautionary tale filled with practical advice inspired from personal experience. It serves as a motivating factor to your journey to become debt-free. You learn how to prioritize your needs over your wants.
The author explains how our lack of attention and societal demands cause us to stray from our path. He highlights how people spend not for themselves but to keep up with others.
The book emphasizes how important your resolution is to accumulate wealth. An unwavering commitment will allow you to save more money, to reach new heights and to unlock new levels of achievements.
Let the 52 Week Money Challenge help you get out of the habit of impulse buying and splurging. Take this step in order to build your first emergency fund, to pay your debts and to build your wealth.
Since you understand why an emergency fund is a necessary financial tool, get started. Once you do, you’ll slowly build up an emergency fund in time. Check your balance every few months to see your progress. After reaching the threshold you set for yourself, you can splurge a tad more on maintenance and leisurely items. What you really need to learn is what constitutes an emergency and what doesn’t.
Financial emergencies include major expenses that demand the use of money instantly. It has to be related to your financial stability, medical services and assets or properties. Having the ability to pay for an unexpected circumstance will not only alleviate your troubles for the future but will also help you feel confident in your own skin. Let this air of confidence help you clear your debts until you’re unburdened.