If you’ve ever seen anything related to personal finance, you’ve heard about an emergency fund. The exact details vary — some people recommend three or six months of expenses while others suggest a specific amount. But the purpose is always the same. You want to have some savings to draw on in case things don’t go as planned.
If you lose your job, get in a car accident, or have a medical issue, you can use your emergency fund to avoid going into debt. But that’s not the only reason to have one. It’s called an emergency fund, but it’s so much bigger than just a safety net.
Here at Everyday Money, we know it can be hard to save for an emergency fund, especially if your budget is tight. But this type of savings account has many benefits beyond just being a backup plan. Here are some other ways your emergency fund improves your financial life.
It’s not just for emergencies
Of course, a full emergency fund is a lifesaver if you do have an emergency. Your furnace dies, your child breaks an arm, your house floods — with an emergency fund, you can handle those unexpected expenses without maxing out a credit card or applying for a personal loan.
But an emergency fund isn’t only useful for unplanned circumstances. It can also improve your daily financial health. With a well-funded savings account, you can start to move away from a paycheck-to-paycheck lifestyle. You have a cushion for those smaller unanticipated expenses.
Maybe you don’t lose your house to a hurricane but you blow a tire and need a replacement. Or your child decides they want to play competitive soccer and you need to cover the cost of quality gear and tournament fees.
With some savings in the bank, you can handle things like this that are outside of your normal budget. You don’t have to worry about how you’re going to make it until the next payday.
You’re saving for security
Another fantastic benefit of a full emergency fund is a feeling of financial security. Just knowing that money is there can take a huge weight off your shoulders. You can feel confident in your financial situation because you know in the back of your mind that you have a safety net if you need it.
This sense of financial security can even improve your mental health. Of course, having a savings fund isn’t a cure for clinical depression or anxiety, but it can help you fight commonplace feelings of worry or doubt. When you know you have a stable bank account and the means to handle unexpected expenses, it can eliminate those nagging worries that lead to arguments with your partner over money.
A healthy emergency fund equals freedom
Financial freedom is one of the best benefits of having an emergency fund. With that savings in the bank, you have far more financial freedom than you do if you’re living paycheck-to-paycheck.
One commonly suggested figure for an emergency fund is $10,000. Just think about how it would feel to have that money in the bank. That amount of savings can be life-changing! Having it there gives you so many more options when it comes to making financial decisions, whether those are related to an emergency or not.
All progress counts
So how do you build an emergency fund? How do you make it to $10,000 if your budget seems tight? Start small. It sounds simple, but it really is the best strategy. Even saving a little bit each month is better than saving nothing.
Another thing that can boost your emergency fund? Unexpected resources. Take advantage of savings opportunities that come your way. Maybe it’s a tax refund, an inheritance, or some other windfall. These situations offer an excellent way to build up your savings without having to touch your monthly budget.
It can be hard to keep saving when you don’t feel like you’re making progress. Staying motivated is challenging when saving doesn’t feel nearly as satisfying as investing in a hot stock or spending money on a dream vacation. When the motivation starts to wane, talk with your partner and remind each other why you’re trying to save.
Enjoy the benefits of an emergency fund
Saving might not be as sexy as investing in the stock market or landing a big raise, but it’s crucial for your overall financial health. Having a strong emergency fund not only gives you resources for unplanned expenses but also provides a comforting sense of security. No matter how much money you have in your savings account, its true value is far more than just that number.
If you’re ready to build up your emergency fund, the Everyday Money team is here to help. We have some excellent free resources as well as a fun and innovative approach to budgeting. Sit down with your partner and your BudgetingBlocks™ and figure out how you want to build your emergency fund.