An emergency fund, also sometimes called a rainy day fund, is a specific amount of cash that has been set aside to be used when a financial emergency hits. The key word being an emergency. This means it’s something unexpected that couldn’t be planned for and needs to be taken care of, such as medical or health-related related, a job layoff, or expensive car repairs.
(I am not a financial expert. All information is based on my own personal experience and research. This information is not meant to be financial advice and is just for educational purposes. This post includes some affiliate links. If you click an affiliate link and make a purchase, I may receive a small commission.)
A financial emergency is not taking a trip to Europe, a cruise to the Bahamas, going to your friend's wedding, or buying a new outfit. They can sometimes be unexpected, but they can be avoided and don’t need to happen.
I’ve had an emergency fund for years. Since college, actually, and it’s been a few years since I graduated from college. Starting and having an emergency fund was something my parents encouraged me to create.
I’ve needed to use my emergency fund a couple of times when I got laid off. From my experience of having an emergency fund and hearing the experiences of others who haven’t had one, I plan to always have one around, and here are four reasons why.
With my emergency or rainy day fund in place, I was then able to focus my time and stress on finding a new job that was the right fit. I also wasn’t tempted to take just any offer because I didn’t need to get a job right away.
You also feel like you have more options. In talking with people who don’t have an emergency fund, they tend to buy a new car vs fixing their current car because they don’t have the $3,000 for the repair but think they can afford the $500 a month payment. In the long run, they end up spending a lot more than $3,000.
I’ve heard of people who had a close family member die several states away, and they were able to take a few days off work and book travel to go to the funeral without batting an eye because they had the cash in their emergency fund.
So that $1,000, $500, or even $3,000 emergency you didn’t have the cash for costs you more in the long run. That can make it harder to save up because more money is going to repay that loan.
Even taking from your 401k costs you money over time. When you take from your 401k, you typically run into interest and fees that need to be paid. Plus, you lose out on earnings that money would have gained had you not taken it out. A double penalty.
A financial emergency is not taking a trip to Europe, a cruise to the Bahamas, going to your friend's wedding, or buying a new outfit. They can sometimes be unexpected, but they can be avoided and don’t need to happen.
I’ve had an emergency fund for years. Since college, actually, and it’s been a few years since I graduated from college. Starting and having an emergency fund was something my parents encouraged me to create.
Related read: How To Grow Your Emergency Savings This Year <<<<https://www.arelaxedgal.com/2017/02/how-build-an-emergency-fund.html>>>
I’ve needed to use my emergency fund a couple of times when I got laid off. From my experience of having an emergency fund and hearing the experiences of others who haven’t had one, I plan to always have one around, and here are four reasons why.
You feel less stressed
Knowing that I have money in the bank that I can pull from when I need to makes me less likely to worry. When I was laid off, I didn’t have to stress over money. Now, I was living on a tight budget, but I wasn’t concerned about only having enough money to last me a few weeks or how I was going to pay my bills because I had enough to last me for months.With my emergency or rainy day fund in place, I was then able to focus my time and stress on finding a new job that was the right fit. I also wasn’t tempted to take just any offer because I didn’t need to get a job right away.
You make better decisions
It sounds crazy, but it’s true. When you have that emergency cash set aside when the time comes to use it, you’re less likely to panic because you don’t have to wonder or worry where the money is going to come from.You also feel like you have more options. In talking with people who don’t have an emergency fund, they tend to buy a new car vs fixing their current car because they don’t have the $3,000 for the repair but think they can afford the $500 a month payment. In the long run, they end up spending a lot more than $3,000.
Things feel less like an emergency
This kinda plays into the last reason. When you have the money to cover the unexpected expense, you don’t panic. You can also focus on the situation at hand.I’ve heard of people who had a close family member die several states away, and they were able to take a few days off work and book travel to go to the funeral without batting an eye because they had the cash in their emergency fund.
Related read: The 3 Best High Yield Savings Accounts For Your Emergency Fund <<<<https://www.arelaxedgal.com/2021/08/best-high-yield-savings-accounts.html>>>
Helps you stay out of debt
This is a big one. Many Americans use a credit card or their 401k to cover emergencies, meaning they are going into debt. And debt isn’t free money; it’s money that has to be paid back within a certain period of time along with interest and, in the case of the 401k fees.So that $1,000, $500, or even $3,000 emergency you didn’t have the cash for costs you more in the long run. That can make it harder to save up because more money is going to repay that loan.
Even taking from your 401k costs you money over time. When you take from your 401k, you typically run into interest and fees that need to be paid. Plus, you lose out on earnings that money would have gained had you not taken it out. A double penalty.
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